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Baby Dragon Merchandising Profit Analysis

Baby Dragon Merchandising Company is evaluating the impact of dropping Product B on its overall net income, which could lead to a 10% decrease in sales of Product A. Additionally, the company is considering increasing advertising for Product A, which may increase its sales but decrease Product B's sales by 5%. The document outlines various scenarios and their potential effects on the company's profitability, including the introduction of a new product and changes in pricing strategies.

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81 views1 page

Baby Dragon Merchandising Profit Analysis

Baby Dragon Merchandising Company is evaluating the impact of dropping Product B on its overall net income, which could lead to a 10% decrease in sales of Product A. Additionally, the company is considering increasing advertising for Product A, which may increase its sales but decrease Product B's sales by 5%. The document outlines various scenarios and their potential effects on the company's profitability, including the introduction of a new product and changes in pricing strategies.

Uploaded by

bagaynovi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

DISCUSSION EXERCISES

KEEP OR DROP A SEGMENT

BABY DRAGON MERCHANDISING COMPANY has products, A and B. A recent monthly income
statement for the company follows:

TOTAL PRODUCT A PRODUCT B


No. of units sold 250,000 150,000 100,000
Sales P4,000,000 P3,000,000 P1,000,000
Less: Variable 1,300,000 900,000 400,000
expenses
Contribution Margin 2,700,000 2,100,000 600,000
Less: Fixed expenses 2,200,000 1,400,000 800,000
Net operating income P 500,000 P 700,000 P(200,000)
(loss)

A study indicates that P340,000 of the fixed expenses being charged to PRODDUCT B are sunk
costs or allocated costs that will continue even if B is dropped.

REQUIREMENTS: Answer each of the following questions independently, unless otherwise


instructed

(a) Management is considering dropping PRODUCT B but will result in a 10% decrease in the sales
of PRODUCT A. If the company will push through the proposed action, what would be its effect on
the company’s net income as a whole?

(b) The managers are considering increasing advertising for product A by P40,000. They expect to
achieve a 10% increase in volume for product A with no change in selling price, but some of that
increase will be the expense of product B. Sales of B are expected to decline by 5%. What will total
profit be if the managers approve the proposed action?

(c) What is the maximum percentage decline in volume of product B that would leave the action in
requirement (b) just barely desirable?

(d) The managers are considering dropping product B and replacing it with product C. Introducing
product C would increase total fixed costs by P175,000. C’s contribution margin percentage is 40%
and is expecting sales of P1,500,000. What is the expected new profit of the company after
approving the proposal?

(e) The company is considering increasing the sales price of B is increased to P15 with a decrease
in the number of units sold to 90,000. What is the effect on income of the proposed action? (f) Part
of the plant in which A is produced can easily be adapted to the production of B, but changes in
quantities may make changes in sales prices advisable. If production of A is reduced to 100,000
units (to be sold at P25 each) and production o

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