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$12per unitVariable costs 2per unitFixed costs 40,000per month

Assume that the company plans to sell 6,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

 

What is the impact on operating profit if variable costs per unit decrease by 15 percent? Increase by 30 percent?

 

Answer 1

Calculation of impact on operating profit if variable costs per unit decrease by 15 percent
	Current		Variable costs per unit decrease by 15 percent		Increase / (decrease) in operating profit
	Per Unit	Total	Per Unit	Total
Sales	$12.00	$72,000.00	$12.00	$72,000.00
Less : Variable cost	$2.00	$12,000.00	$1.70	$10,200.00
Contribution Margin	$10.00	$60,000.00	$10.30	$61,800.00
Less : Fixed Cost		$40,000.00		$40,000.00
Operating Income		$20,000.00		$21,800.00	$1,800.00
Calculation of impact on operating profit if variable costs per unit increase by 30 percent
	Current		Variable costs per unit increase by 30 percent		Increase / (decrease) in operating profit
	Per Unit	Total	Per Unit	Total
Sales	$12.00	$72,000.00	$12.00	$72,000.00
Less : Variable cost	$2.00	$12,000.00	$2.60	$15,600.00
Contribution Margin	$10.00	$60,000.00	$9.40	$56,400.00
Less : Fixed Cost		$40,000.00		$40,000.00
Operating Income		$20,000.00		$16,400.00	-$3,600.00