Managerial Accounting: C&C Sports Continuing Problem 3-41 CVP Analysis

Managerial Accounting 
C&C Sports Continuing Problem 3-41 CVP Analysis 
Universal Sports Exchange has just received notice from C&C Sports that the price of baseball jersey will be increasing to $15.30 next year. In response to this increase, Universal is planning its sales and marketing campaign for the coming year. Managers have developed two possible plans and have asked you to evaluate them. 
The first plan calls for passing on the entire $0.50 cost increase to customers through an increase in the sales price. Managers believe that $10,000 in additional advertising targeted directly to current customers will allow the sales force to reach the current year's sales volume of 51,975 jerseys. 
The second plan relies on a new advertising campaign that focuses on the sales price remaining the same as last year. The campaign would include a new database that offers more potential customers than Universal has had access to in the past. The cost of the campaign is expected to be $5,000. Managers believe that the campaign will be more successful in generating new sales than the current incentive-based sales and marketing plan. As a result, they want to reduce the sales commission from 6% to 4% of sales and increase sales salaries by $22,000. The campaign is expected to generate an additional 10% in sales volume. 
Contribution Format Income Statement 
For the 52 Weeks Ending February 1, 2014 
Per Unit Ratio 
Sales 1,039,500 20.00 100% 
Less Variable Expenses: 
Cost of goods sold 769,230 14.80 74% 
Sales commission 62,370 1.20 6% 
Total variable expenses 831,600 16.00 80% 
Contribution margin 207,900 $4.00 20% 
Less Fixed Expenses: 
Selling expenses 116,500 
Administrative expenses 51,500 168,000 
Operating income $39,900 

a. How much operating income decrease if Universal did nothing to recover the increase in cost of goods sold, all other things equal (Round intermediate calculations andfinal answer to 2 decimal places e.g. 0.38) 
b. Determine the expected operating income under each proposed sales and marketing plan. (Round intermediate calculations andfinal answer to 2 decimal places e.g. 0.38) 
c. Why does the first plan result in a reduction in operating income that is greater than the $5,000 advertising? 
d. Which plan do you recommend to management? Why?
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