ACCT6004 Management Accounting - Group Case Study Assignment Help

ACCT 6004 GROUP CASE STUDY ASSIGNMENT
Activity 2: CVP Analysis for Sports-Strength

Sports-Strength has just received notice from J&B Sports that the price of a soccer jersey will be increasing to $15.30 next year. In response to this increase, Sports-Strength 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 $15,000 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 Sports-Strength has had access to in the past. The cost of the campaign is expected to be $10,000. 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 16% in sales volume.

Required:

Using the information in Exhibit 2 as a starting point, answer the following questions:
e. Why does the first plan result in the reduction in operating income that is greater than the $15,000 advertising?