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Drake, Inc. manufactures electric welders that it sells to other manufacturers, and sales last year were...

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Finance

Drake, Inc. manufactures electric welders that it sells to othermanufacturers, and sales last year were $45 million. Drake has a35% contribution margin. The marketing manager has suggestedincreasing the number of sales representatives by five, which wouldcause fixed costs to increase by $250,000. Another suggestion is toreduce price by 10%. What incremental dollar volume would benecessary to break even on the suggestion to hire five additionalsales reps? What absolute increase in dollar sales volume would benecessary to maintain Drake’s current contribution if price wasreduced by 10%? Which suggestion do you think Drake shouldimplement? Explain your recommendation

Answer & Explanation Solved by verified expert
3.9 Ratings (557 Votes)

1-
sales 45
v.cost 45*(1-.35) 29.25
contribution margin 15.75
contribution margin ratio = contribution/sales 15.75/45 0.35
incremental sales to recover the fixed cost of 5 new sales representatives .25/35% 0.71
new level of sales to recover fixed cost 45+.71 45.71
2-
sales 45*(1-.1) 40.5
variable cost as of before 29.25
new contribution margin 11.25
new contribution margin ratio = contribution/sales 27.78%
total contribution margin required as before 15.75
new level of sales = contributin margin/new contribution margin ratio 15.75/27.78% 56.70
absolute increase in sales 56.70-45 11.7
3-
Dark should implement employment of additional sales representatives because this fixed cost can be recovered by additional sales of .71 million while if prices are reduced by 10% then additional sales of 11.7 million would be made additional to maintain the present level of contribution margin

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Transcribed Image Text

Drake, Inc. manufactures electric welders that it sells to othermanufacturers, and sales last year were $45 million. Drake has a35% contribution margin. The marketing manager has suggestedincreasing the number of sales representatives by five, which wouldcause fixed costs to increase by $250,000. Another suggestion is toreduce price by 10%. What incremental dollar volume would benecessary to break even on the suggestion to hire five additionalsales reps? What absolute increase in dollar sales volume would benecessary to maintain Drake’s current contribution if price wasreduced by 10%? Which suggestion do you think Drake shouldimplement? Explain your recommendation

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