Accounting Report: A Comprehensive Analysis of Profitability Options

This accounting report evaluates three options for Performance Sports to improve its profitability. Option 1 involves increasing the selling price by 10%, which would minimize the sales volume by 5%, resulting in an operating income of $230,000. Option 2 suggests reducing the selling price by 10%, expecting an 8% rise in sales volume, leading to an operating income of $516,000. Option 3 proposes increasing advertising costs by $200,000, anticipating a 15% increase in sales volume and an operating income of $630,600. The report discusses the advantages and disadvantages of each option, ultimately suggesting that option 2 is the most feasible investment despite option 3's potential for higher operating income. It also includes a detailed table presenting the projected operating profit/loss for each option, with option 3 being accepted due to its potential to significantly improve business operations through increased profit levels.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
1. Projected operating profit or loss for option 3 and determination of its acceptability:...............2
2. Advantages and disadvantages of option 3:.................................................................................2
3. Discussion of each option based on the group findings:.............................................................3
References:......................................................................................................................................5
Appendix:........................................................................................................................................6

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1. Projected operating profit or loss for option 3 and determination of its acceptability:
The projected operating profit/loss for each of the three options has been presented in the
form of a table (Refer to Appendix). In this case, the third option is selected, in which the
advertising cost would increase by $200,000 and this would lead to rise in sales volume by 15%.
The base case scenario states that Performance Sports has suffered operating loss of ($30,000);
however, if this alternative is adopted, it would lead to operating profit of $630,600. Hence, from
the profitability point of view, this option could be accepted, as the organisation would be able to
improve its business operations with the help of increased profit level.
2. Advantages and disadvantages of option 3:
Based on the above discussion, the following advantages are inherent in the third
alternative:
 As the cost of advertising increases, the brand visibility of Performance Sports would
increase in tandem as well (Boardman et al., 2017).
 Additional advertising helps in developing lasting relationships with the intended
audience, which would help in increasing its overall sales volume.
 If Performance Sports spends additional amount on advertising, there would be rise in the
volume of sales by 15%. Such additional sales volume would raise its profit margin,
which would help in enjoying competitive advantage in the operating market.
However, this alternative might have negative repercussions on the profitability of
Performance Sports, which are discussed as follows:
 The overall expenses of the organisation would increase, which might reduce its profit
margin (Damodaran, 2016).

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 If the increased advertising cost fails to meet the intended target of raising the sales
volume by 15%, serious losses might be incurred and as a result, the operating loss would
increase from $30,000 to $50,000.
3. Discussion of each option based on the group findings:
The evaluation of each of the options provided is discussed as follows:
Option 1:
According to this option, the selling price would increase by 10%, which would minimise
the sales volume by 5%. In this case, the new sales revenue obtained is $2,860,000 and as a
result, there would be operating income of $230,000. However, the increased selling price might
result in additional loss of sales volume, as the customers might switch to the competitors (Iooss
& Lemaître, 2015).
Option 2:
According to this alternative, the selling price would be reduced by 10%, due to which it
is expected that the sales volume would rise by 8%. Even if the selling price falls, the company
would make operating income of $516,000. In this case, the fall in selling price would help in
generating additional revenues for the organisation, as the chance of customer turnover is
minimised due to lower selling price (Vu-Bac et al., 2016).
Option 3:
This option states that advertising costs would increase by $200,000, which would to lead
to increase in sales volume by 15%. In this case, the operating income is expected to be

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$630,600. However, if the advertising campaign fails to meet the desired goal, the outcome
might be negative and as a result, the organisation might suffer additional operating loss.
Hence, based on the above evaluation, it could be inferred that option 2 is the most
feasible investment, despite the fact that the third alternative would fetch additional operating
income in contrast to the other two options.

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References:
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit
analysis: concepts and practice. Cambridge University Press.
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Iooss, B., & Lemaître, P. (2015). A review on global sensitivity analysis methods. In Uncertainty
management in simulation-optimization of complex systems (pp. 101-122). Springer,
Boston, MA.
Vu-Bac, N., Lahmer, T., Zhuang, X., Nguyen-Thoi, T., & Rabczuk, T. (2016). A software
framework for probabilistic sensitivity analysis for computationally expensive
models. Advances in Engineering Software, 100, 19-31.

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Appendix:
Particulars Details Base Case Scenario 1 Scenario 2 Scenario 3
Sales volume (in units) A 1,300 1,235 1,404 1,495
Selling price per unit B $ 2,000 $ 2,200 $ 1,800 $ 2,000
Total sales C=A*B $ 2,600,000 $ 2,860,000 $ 3,146,000 $ 3,460,600
Variable costs:
Goods sold volume (in
units) D 1,300 1,300 1,300 1,300
Cost of goods sold per
unit E $ 800 $ 800 $ 800 $ 800
Total cost of goods sold F=D*E $ 1,040,000 $ 1,040,000 $ 1,040,000 $ 1,040,000
Volume of selling and
administration (in units) G 1,300 1,300 1,300 1,300
Selling and
administration cost per
unit H $ 300 $ 300 $ 300 $ 300
Total selling and
administration cost I=G*H $ 390,000 $ 390,000 $ 390,000 $ 390,000
Total variable costs J=F+I $ 1,430,000 $ 1,430,000 $ 1,430,000 $ 1,430,000
Contribution margin K=C-J $ 1,170,000 $ 1,430,000 $ 1,716,000 $ 2,030,600
Fixed costs:
Cost of goods sold L $ 800,000 $ 800,000 $ 800,000 $ 800,000
Selling and M $ 400,000 $ 400,000 $ 400,000 $ 600,000

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administration cost
Total fixed costs N=L+M $ 1,200,000 $ 1,200,000 $ 1,200,000 $ 1,400,000
Operating profit/loss O=K-N $ (30,000) $ 230,000 $ 516,000 $ 630,600