21 May WHAT IS ALPHA’S DOLLAR BREAK-EVEN POINT FOR THE NEW BRANCH?
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- Alpha Auto sells high-end “previously owned” cars, such as Audis, BMWs, etc. Alpha is looking at opening a new showroom and has completed a detailed marketing plan, based on financial data from the original branch. It expects sales to be $2,650,000. The cost of the cars is 50% of sales. Salespeople at the original branch are paid a base salary plus a commission of 20% of each car they sell. Alpha expects to use this compensation plan at the new branch but has added an additional 5% to the commission rate to attract good salespeople. Base salaries are forecast at $250,000. Alpha is planning to use newspapers as its primary advertising media, and will use these to announce a special first year promotion of a 5% rebate on each car sold. Advertising cost is $10,000. Rent and other overhead costs for the showroom are projected at $125,000, and administrative salaries and expenses at $110,000.
- Develop a pro forma income statement for the first year of Alpha’s new branch using the information given.
- Given some concerns about economic conditions, Alpha would like to know how this new showroom would do if sales are 10% less than forecast. Develop a second pro forma income statement for this situation.
- Describe at least one marketing action Alpha could take to address the situation in question 2b and develop a third pro forma to illustrate its impact. You can make reasonable assumptions about what will happen—just indicate what they are.
- Alpha would like to develop some additional financial information to help them examine the potential success of the new showroom the first year (without considering the 10% sales reduction).
- Complete a performance analysis for Alpha Auto’s new branch for the first year.
- What is Alpha’s dollar break-even point for the new branch?
- What does this tell you about Alpha’s new branch? What marketing actions should Alpha take?
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