Question

Baldwin Company's product Best has Fixed Costs of $100,000, capacity of 10,500 units, sales of 10,000 units, selling price per unit of $25, 1st shift labor costs per unit of $10, and a contribution margin ratio of 60% prior to overtime due to using the second shift. Baldwin is considering investing in a Marketing program that costs $22,000 and is projected to increase sales volume by 10%. All else constant, if Baldwin makes this decision based on a minimum acceptable ROI in the first year of 60% for the project, should they invest in this marketing program?

Answer 1

Answer:

NO, it's not good to invest in this marketing program.

Explanation:

Quantity Unit TOTAL Income Statement

10,000  $ 25,00 $ 250,000 Total Net Sales

        $ 10,00 -$ 100,000 Variable Cost

         60%          $ 150,000 Contributing Margin

                 -$ 100,000 Anual Fixed Costs

          20%       $ 50,000 Segment Margin

Under the actual conditions the company generate a contributing margin of 60% and a segment margin of 20%.

===============================================================

Quantity  Unit  TOTAL     Income Statement

   11,000  $ 25,00 $ 275,000 Total Net Sales

                        $ 10,00 -$ 110,000 Variable Cost

                      60%          $ 165,000 Contributing Margin

                          -$ 122,000 Anual Fixed Costs

                     16%     $ 43,000 Segment Margin

If the program it's implemented we get the same Contribution Marging because it doesn't affect the Variable Cost but the Segment Margin it's negativly affected reducing it 4%.

It occurs because the Contribution Margin of the improvement doesn´t cover the total cost of the investment, it generates $15,000 of Contribution Maring but the Cost of the program it's $22,000.