Question

Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors. The company has collected the following price and cost characteristics:

Sales price	$	15	per unit
Variable costs		5	per unit
Fixed costs		50,000	per month

Required:

a. What number must Warner sell per month to break even?

b. What number must Warner sell per month to make an operating profit of $34,000?

Assume that the company plans to sell 9,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

Required:

a. What will be the operating profit?

b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?

c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

d. Suppose that fixed costs for the year are 20 percent lower than projected, and variable costs per unit are 20 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?

Answer 1

a)	BEP(units) = fixed cost/contribution margin per unit
		50,000/(15-5)
		5000	answer
b)	BEP(units)          = (fixed cost + target profit)/contribution margin per unit
			(50000+34000)/10
			8400
c-a)	operating profit
	contribution margin		(9000*10)			90,000
	less : fixed expense					50,000
	operating profit					40,000
c-b)
	selling price per unit					13.5	18
	less variable cost per unit					5	5
	contribution margin per unit					8.5	13
	units sold					9000	9000
	total contribution margin					76500	117000
	less fixed expense					50,000	50,000
	operating profit					26,500	67,000
	decrease in operating profit					13,500
	increase in operating profit						27,000
c-c)
	selling price per unit					15	15
	less variable cost per unit					4.5	6
	contribution margin per unit					10.5	9
	units sold					9000	9000
	total contribution margin					94500	81000
	less fixed expense					50,000	50,000
	operating profit					44,500	31,000
	increase in operating profit					4,500
	Decrease in operating profit						9,000
c-d)
	selling price per unit					15
	less variable cost per unit					6
	contribution margin per unit					9
	units sold					9000
	total contribution margin					81000
	less fixed expense					40,000
	operating profit					41,000
	increase in operating profit					1,000