Megalomaniak Limited Case Study

Megalomaniak Limited

Case Study Problem

Original Scenario:

| Sales (80,000 units) | | $ 4,000,000 |

Less | Variable costs: | | |

| Direct materials | 800,000 | |

| Direct wages | 600,000 | |

| Var. prod. overhead | 100,000 | |

| Total variable costs | | 1,500,000 |

| Contribution margin | | $ 2,500,000 |

Less | Fixed overheads: | | |

| Production | 1,000,000 | |

| Administration | 600,000 | |

| Marketing | 500,000 | |

| Total fixed overheads | | 2,100,000 |

| Profit | | $ 400,000 |

At the selling price of $50 per unit and the unit variable cost of $18.75 we have a contribution margin of $31.25. The total fixed overheads amount to $2,100,000. Thus, we reach a profit of $4,000,000.

Scenario A:

Proposed strategies:

* Selling price reduction by 10%;

* Increase in sales revenue by 25%;

* Fixed marketing overhead increase by $25,000;

* Fixed production overhead increase by $50,000.

| Sales (111,111 units) | | $ 5,000,000 |

Less | Variable costs: | | |

| Direct materials | 1,111,111 | |

| Direct wages | 833,333 | |

| Var. prod. overhead | 138,889 | |

| Total variable costs | | 2,083,333 |

| Contribution margin | | $ 2,916,667 |

Less | Fixed overheads: | | |

| Production | 1,050,000 | |

| Administration | 600,000 | |

| Marketing | 525,000 | |

| Total fixed overheads | | 2,175,000 |

| Profit | | $ 741,667 |

In this example we use the sales revenue derived at the new selling price to determine a 25% increase in sales revenue. We have a change in price by 10% increase, which would lead to a unit selling price of $45 and volume of 111,111 units. The proposed measure will increase profit to $741,667 which is a 85% increase compared to the current scenario.

Reducing the selling price might be a good “quick-fix” solution for the short-term to maximize profit and boost sales, but has the...