Drake, Inc. manufactures electric welders that it sells to other manufacturers, and sales last year were $45 million. Drake has a 35% contribution margin. The marketing manager has suggested increasing the number of sales representatives by five, which would cause fixed costs to increase by $250,000. Another suggestion is to reduce price by 10%.

1. What incremental dollar volume would be necessary to break even on the suggestion to hire five additional sales reps?

Incremental dollar Volume

Breakeven              =

Incremental Increase in Fixed expenses

Contribution Margin

                                                   250,000

35.00%

                                              714,285.71

Incremental dollar volume would be necessary to breakeven on the suggestion to hire five additional sales reps will be $714,285.71

2. What absolute increase in dollar sales volume would be necessary to maintain Drake's current contribution if price was reduced by 10%?

3. Which suggestion do you think Drake should implement? Explain your recommendation.