Question

Derby Phones is considering the introduction of a new model of headphones with the following price and cost characteristics.

Sales price	$	23	per unit
Variable costs		7	per unit
Fixed costs		25,000	per month

Assume that the projected number of units sold for the month is 5,500. Consider requirements (b), (c), and (d) independently of each other.

Required:

a. What will the operating profit be?

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 10 percent lower than projected, and variable costs per unit are 10 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?

Hunter & Sons sells a single model of meat smoker for use in the home. The smokers have the following price and cost characteristics.

Sales price	$	79	per smoker
Variable costs		31	per smoker
Fixed costs		374,400	per month

Hunter & Sons is subject to an income tax rate of 40 percent.

Required:

a. How many smokers must Hunter & Sons sell every month to break even?

b. How many smokers must Hunter & Sons sell to earn a monthly operating profit of $74,880 after taxes?

Answer 1

Ans:

Sales price per Unit : $23

Variable costs per Unit : $7

Fixed costs : $25,000

a.

Sales Units : 5,500

Operating profits = Sales - Operating expenses

Sales = 5,500 * $23 = $126,500

Variable costs : 5,500 * $7 = $38,500

Fixed costs : $25,000

Operating Profits : $126,500 - $38,500 - $25,000 = $63,000

b.

When Sales price dereases by 10% other factors remains same.

Sales : 5,500 * ($23 * 90%) = $113,850

Operating Profits = $113,850 - $38,500 - $25,000 = $50,350

When Sales price increases by 20% other factors remains same.

Sales : 5,500 * ($23 * 120%) = $151,800

Operating Profits = $151,800 - $38,500 - $25,000 = $88,300

c.

When Variable cost dereases by 10% other factors remains same.

Variable costs : 5,500 * ($7* 90%) = $34,650

Operating Profits = $126,500 - $34,650 - $25,000 = $66,850

When Variable cost increases by 20% other factors remains same.

Variable costs : 5,500 * ($7* 120%) = $46,200

Operating Profits = $126,500 - $46,200 - $25,000 = $55,300

d.

If Fixed costs are lower and variable cost are up by 10%.

Fixed costs : $25,000 * 90% = $22,500

Varaible costs : $5,500 * ($7 * 110%) = $42,350

Sales (usual) : $126,500

Operating profits : $126,500 - $42,350 - $22,500 = $61,650

Operating profits will decrease by : $63,000 - $61,650 = $1,350

*As you have not mentioned which 4 parts are to be answered, first 4 subparts are provided.

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