Question

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n)
(increase/decrease) of $ [blank]
. (Enter either increase or decrease and the dollar amount as a whole number.)

Answer 1

To calculate the impact on total contribution margin, we first need to determine the current and new contribution margins per pillow and then the total contribution margins before and after the change.

1. **Current Contribution Margin:**
- Selling price per pillow: $25
- Current variable costs per pillow: $15
- Current contribution margin per pillow: \(25 - 15 = 10\)
- Current sales volume per month: 1,200 pillows
- Total current contribution margin: \(10 \times 1200 = 12,000\)

2. **New Contribution Margin after improving materials:**
- Selling price per pillow: $25
- New variable costs per pillow: $19
- New contribution margin per pillow: \(25 - 19 = 6\)
- New sales volume per month: 1,500 pillows
- Total new contribution margin: \(6 \times 1500 = 9,000\)

3. **Impact on Total Contribution Margin:**
- Change in contribution margin: \(9,000 - 12,000 = -3,000\)

Thus, the impact of this change on total contribution margin would be a **decrease** of **$3,000**.

Final answer: decrease of $3,000.