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Variable Costing Analysis

Your company has a market share of 25%. The total market size is $100 million. 1) Your contribution margin (the ratio of the contribution per unit over the price per unit) is 20%. Your variable cost is $16 per unit.

You are thinking of hiring 10 more salespeople. The annual cost per salesperson (including salary and benefits) is $120,000. In addition, each salesperson receives as a bonus 10% of the sales he or she generates. How much should your market share increase to make this a profitable action? (Hint: To solve the problem you need to calculate the price per unit and then calculate the new contribution per unit that will reflect the added cost of the 10% bonus given to the salespeople.) You must show all calculations to receive credit.

2) Forsman, Inc. has sales of $10,000,000. The contribution margin is 40% and the fixed costs are $1,000,000. The price per unit is $10. The company is considering two different strategies for increasing their profits:

1. Spend $800,000 in advertising. The result is expected to increase the company's sales by 50%.
2. Reduce the price by 20%. The price-demand elasticity is 2.0.

Which of the two strategies will generate the highest profits? You must show all calculations to receive credit.