Full file at https://testbankuniv.eu/Accounting-for-Decision-Making-and-Control-8th-Edition-Zimmerman-Solutions-Manual Chapter 02 - The Nature of Costs
Innovative Sports’ contribution margin for each unit sold to the distributor is: Selling price Less: Manufacturing cost Contribution margin
$30.85 9.55 $21.30
Since every 10 Puttmasters sold via infomercials reduces retail store sales by two units, 10 infomercials cause $42.60 (2 × $21.30) of lost contribution margin from retail sales. Therefore, each infomercial sale has an opportunity cost of $4.26 ($42.60 ÷ 10). Hence, the net contribution margin of each infomercial sale is: Contribution margin Less: Contribution margin (retail sale) Net contribution margin
$68.55 4.26 $64.29
To breakeven on each infomercial, Innovative Sports must sell 13,143 Puttmasters ($845,000 ÷ $64.29). The following table calculates the expected number of Puttmasters to be sold from repeated showings of the infomercial assuming that each showing generates 90 percent of unit sales as the previous showing. Showing Number 1 2 3 4 5 6
Units Sold 22,000 19,800 17,820 16,038 14,434 12,990
Innovative Sports will want to continue to purchase infomercial TV spots as long as each 30-minute spot continues to produce total contribution margin in excess of the infomercial’s cost ($845,000) after taking into account the affect of the infomercial on reducing retail sales. From the above table, we see that five infomercials produce sales in excess of the 13,143 breakeven point. Therefore, the profit-maximizing number of infomercials is five. The following table confirms this conclusion.
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Full file at https://testbankuniv.eu/Accounting-for-Decision-Making-and-Control-8th-Edition-Zimmerman-Solutions-Manual