1. Sam and Denny's ice cream shop charges $1.7 for a cone. Variable expenses are $0.34 per cone, and fixed costs total $2,200 per month. A "sweetheart"promotion is being planned for the second week of February. During this week, a person buying a cone at the regular price would receive a free cone for a friend. It is estimated that 750 additional cones would be sold and that 950 cones would be given away. Advertising costs for the promotion would be $150.
Calculate the effect of the promotion on operating income for the second week of February. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Net in operating income $ _______
2. Body Sculpture, Inc., makes three models of high-performance weight-training benches. Current operating data are summarized here:
MegaMuscle PowerGym ProForce
Selling price per unit $ 149 $ 203 $ 292
Contribution margin per unit 43 76 57
Monthly sales volume units 3,100 2,040 950
Fixed expenses per month Total of $ 329,100
Calculate the firm's monthly operating income (loss).
Operating income(loss) $ ________
(a) Management is considering the elimination of the ProForce model due to its low sales volume and low contribution margin ratio. As a result, total fixed expenses can be reduced to $282,990 per month. Assuming that this change would not affect the other models, what would be the effect on net operating income.
Net operating income will decrease by $ _______
(b) Assume the same facts as in requirement (a). Assume also that the sales volume for the PowerGym model will increase by 495 units per month if the ProForce model is eliminated. What would be the effect on operating income? (Omit the "$" sign in your response.)
Net operating income will increase $ __________
The first part of the solution illustrates how to compute the impact on net income of a promotion. The second illustrates how to compute the impact of eliminating a product line.