The Lovely Scent Perfume Company has recently suffered record losses. Fredrick Fragrance, the CEO, has asked four of his top executives to recommend a strategy to put the company back on a profitable track.
Wally Workshard, the Executive Vice President, suggested that the company drop its price by 20% and predicts that this will increase sales by 85,000 units per year.
Lester Ledger, the Chief Financial Officer, suggested that the company repackage the product in designer bottles. This would add $4.75 per unit to the production cost and fixed production costs would be increased by $40,000 per year. Lester predicts this would increase annual sales volume by 32%.
Buster Bumble, the Production Manager, suggested that the company reduce the size of the standard bottle by 10%. This would save $2.65 per unit in variable production costs. He predicts sales volume would drop by only 4,500 units per year.
Gaylord Goodspeak, the Marketing Manager, suggested that the company increase its marketing budget by 66% - this would add $527,000 per year to fixed operating expenses. In addition, he recommend raising the price by $4.90 per unit. He predicts that the combined impact would be a 17% increase in annual sales volume.
Use the appended spreadsheet to evaluate each of these proposals independently. You will need to fill in the inputs based on the numbers above. The spreadsheet will then do the remaining calculations. Recommend the best strategy for Mr. Fragrance. Make sure you support your answer with relevant numbers and arguments.
Lovely Scent Perfume Company
Contribution Margin Income Statement
For the Year Ended December 31, 2006
Variable Costs 4,000,000.00
Contribution Margin 3,000,000.00
Fixed Costs 4,000,000.00
Net Income -1,000,000.00
**Attached is the answer**