50.1K

Verified Solution

Link Copied!

can clearly complete the answers ?

Swan Lake Company is engaged in producing ballet shoes for children aged 3 to 6. The current yearly sales of ballet shoes are 38,750 pairs at $120 per pair. The variable costs are $80 per pair and fixed costs are $950,000 per year. Jenny, the company's owner, is not satisfied with present profit level. She is planning to put forward one of the following three proposals: Proposal 1: Increase advertising expenditure of $80,000 to promote sales. It is estimated that the sales quantity will rise by 5%. Proposal 2: Reduce the variable costs per pair to $70. A 15% drop in sales quantity is expected as the shoes will be produced with materials of lower quality. Proposal 3: Lower unit selling price by 10% which will result in 4% increase in sales quantity. The drop in selling price could be justified by 20% decrease in fixed costs and 8% decrease in variable costs per pair. Required: Calculate, for the current year: (a) (i) Unit contribution margin and contribution margin ratio; (4 marks) (ii) Break-even sales [in units and in dollars (S)]; (4 marks) (iii) Margin of safety in units; and (2 marks) (iv) Operating income. (2 marks) (b) By comparing the current operating income in (a)(iv) and new operating income under each of the three proposals, advise Jenny which proposal should be adopted. (11 marks) Discuss why it is important for management to understand cost-volume-profit analysis. (c) (7 marks) (Total 30 marks)

Answer & Explanation Solved by verified expert

See Answer