Answer (A) is correct. If sales units increased by 5%, sales revenue would increase by $375,000. Cost of goods sold would also increase by 5% (an increase of $187,500). The net increase in operating income is $162,500 ($375,000 increase in revenue – $187,500 increase in cost of goods sold – $25,000 increase in advertising expense). The new sales amount is $7,875,000 ($7,500,000 + $375,000), and the new operating income is $787,500 ($625,000 + $162,500). Operating income as a percentage of sales revenue is 10%, which meets the company’s long-term goal.
Answer (D) is correct. A mission statement is a formal, written document that defines an organization’s ultimate purposes in society in general terms. After a situational analysis is performed, the entity develops a group of strategies for achieving the mission.
Answer (A) is correct. The determination of organizational objectives is the first step in the planning process. A mission statement is a formal, written document that defines the organization’s purpose in society, for example, to produce and distribute certain goods of high quality in a manner beneficial to the public, employees, shareholders, and other constituencies. Thus, a mission statement does not announce specific operating plans. It does not describe strategies for technological development, market expansion, or product differentiation because these are tasks for operating management.
Answer (C) is correct. The degree of product differentiation and the costs of switching from one competitor’s product to another increase the intensity of rivalry and competition in an industry. Less differentiation tends to heighten competition based on price, with price cutting leading to lower profits. Low costs of switching products also increase competition.
Answer (B) is correct. Substitutes are types of goods and services that serve the same purpose. All products that can replace a good or service should be considered substitutes. For example, bicycles and cars are substitutes for public transportation. Structural considerations determine the effect substitutes have on one another. However, because substitutes are types (not brands) of goods and services that have the same purposes, brand identity is not a structural consideration affecting the threat of substitutes.
Answer (C) is correct. When purchasing power is concentrated in a few buyers or when buyers are well organized, their bargaining power is greater. This effect is reinforced when sellers are in a capital-intensive industry, such as trucking.
Answer (C) is correct. If it is expensive to switch suppliers, customers will be less motivated to respond to competitor advances.
Answer (A) is correct. Strong brand identity decreases the threat that new competitors will enter an industry. New competitors have difficulty because potential customers are loyal to established firms in the industry.
Answer (A) is correct. Porter developed a model of the structure of industries and competition. It includes an analysis of the five competitive forces that determine longterm profitability measured by long-term return on investment. This analysis results in an evaluation of the attractiveness of an industry.
Answer (A) is correct. Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify competition. Government policy also may affect competition by means of regulations that encourage or discourage substitutes or affect costs, that govern competitive behavior, or that limit growth. Government also may be a buyer or supplier.
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