Servtech Company manufactures two specialty children's toys marketed under the trade names of Springy and Leapy. During the year, the costs, revenue, and capital employed by the company in the production of these two items were as follows:
Management, dissatisfied with the return on total capital employed, is considering a number of alternatives to improve this return.
The market for Springy appears to be underdeveloped. The consensus is that with an increase of $9,500 in the fixed advertising cost, sales can be increased to 325,000 units at the same price. An increase in the production of Springy will require use of some equipment previously utilized in the production of Leapy and a shift of $10,000 of fixed capital and $5,000 of fixed factory overhead to the production of Springy.
For Leapy, it would mean limiting its production to 100,000 units, which could be marketed with the current sales effort at (a) an increase in price of $.15 per unit; (b) without a price increase and with a reduction in current fixed advertising cost of $9,000; or (c) with a $.05 per unit increase in price and a $7,500 reduction in the current fixed advertising cost.
(1) Compute the income before income tax and the return on capital employed for each product and in total for the year, to one tenth of 1%.
(2) Compute the income before income tax and the return on capital employed for each product and in total under each alternative, to one tenth of 1%.
This question was answered on: Jul 11, 2017
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