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

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

Step-by-step 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%.

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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.