Executive Summary:
Nelson Manufacturing sales have been steadily improving since beginning operations in 2001. In 2007 concern over operating performance prompted the owners of Nelson Manufacturing to develop a plan to improve performance. Sales are increasing, but income as a percent of sales and cash flows from operations are declining. The following report provides three alternatives that have been proposed to improve operating income and cash flow. 2007 financial information is included, followed by the expected results of each alternative.

2007 Financial Data:

Alternative 1: Increase the Selling Price and Improve Cart Quality
Summary:
Alternative 1 increases the cart selling price by 14% for all models. Due to the high price elasticity index of carts, annual cart sales are estimated to drop to 39,500 carts, down from 60,000 carts sold in 2007. The increase in sales price exceeds the increase in variable costs, increasing the contribution margin. Operating leverage is increased to 5.56, however due to the decreased sales volume, total operating income falls $229,231 to $250,669.
This strategy is recommended only if sales volume can be sustained or increased. Increased operating leverage allows Nelson to achieve large increases in operating income with increases in sales. Under this scenario, if sales increase 20%, then operating income would increase 111%. Likewise, increased operating leverage increases the risk that if sales decrease by 20%, then operating income will decrease by 111%.

Alternative 1 Projected Financial Data:

Alternative 2: Increasing Fixed Costs with Automation
Summary:
Alternative two automates portions of the cutting, welding and painting departments. Quality is not increased due to automation, so sales price increases 5% from 2007 levels. The contribution margin greatly increases from 2007, however it