Ch14HWSol(6th) - Chapter 14 HW Assignment: E14-2, 5, 7, 9,...

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Chapter 14 HW Assignment: E14-2, 5, 7, 9, 13, 22; P14-7, 11, 13, 21 Solutions E14-2 Strategy A B C Unit price $ 7 $ 9 $ 7 Estimated sales in units × 200,000 × 135,000 × 300,000 Sales revenue 1,400,000 1,215,000 2,100,000 Variable expenses ($4 per unit) 800,000 540,000 1,200,000 Fixed expenses 300,000 300,000 300,000 Additional advertising 400,000 Total expenses 1,100,000 840,000 1,900,000 Pro forma operating profit $ 300,000 $ 375,000 $ 200,000 Unless there are other considerations, the second, higher-priced strategy should be selected to maximize operating profit. E14-5 Company A’s profit margin indicates that it realizes only $0.05 of net income for each $1 of sales it earns. This low profit margin suggests that the company needs to sell a lot of its product to earn a profit. The company’s asset turnover indicates that it is generating $6 in sales for every $1 in assets it owns. This high turnover also reflects a strategy of trying to make up in sales volume what it lacks in profit margin because the company is trying to generate a high sales volume in order to be profitable in spite of the low profit margin. This appears to be a cost leadership strategy. Company B seems to be completely different from A. Company B keeps $0.40 of every $1 it earns in sales and therefore shows it may be able to charge high prices and not have to sell as much product. Company B’s asset turnover is also consistent with this strategy and shows that the company generates only $0.75 of sales for every $1 of assets. Since B charges high prices, B’s sales volume does not have to be as great as A’s sales volume to be profitable. This appears to be a product differentiation strategy. Company C , according to the profit margin, realizes $0.25 of net income for each $1 in sales. The asset turnover ratio indicates that the company earns $1.20 in sales for every $1 of assets it has. Company C appears to have struck a middle ground between cost leadership and product differentiation. It is not as
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Ch14HWSol(6th) - Chapter 14 HW Assignment: E14-2, 5, 7, 9,...

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