Question

Maize Plastics manufactures and sells 100 100 bottles per day. Fixed costs are $ 22 comma 000 $22,000 and the variable costs for manufacturing 100 100 bottles are $ 50 comma 000 $50,000. Each bottle is sold for $ 1 comma 300 $1,300. How would the daily profit be affected if the daily volume of sales drop by 10 10​%?

Answer 1

Calculation of net profit for manufacturing 100 bottles

income statement

particulars	amount $
sales revenue [100 bottles * $1300 per bottle]	130,000
less : variable manufacturing costs [ $ 50,000 /  100 bottles = $ 500 per bottle]	50,000
contribution	80,000
less : fixed costs	22,000
net profit	58,000

When sales volume drop by 10%

sale of 100 bottles reduce to 90 bottles

Calculation of net profit for manufacturing 90 bottles

income statement

particulars	amount $
sales revenue [90 bottles * $1300 per bottle]	117,000
less : variable manufacturing costs [90 bottles * $500 per bottle]	45,000
contribution	72,000
less : fixed costs	22,000
net profit	50,000

* fixed cost does not change with volume of activity it remains same as $ 22,000

** variable manufacturing costs vary according to the volume of activity , therefore for manufacture and sale of 100 bottles it is $ 50,000 whereas for manufacture and sale of 90 bottles it reduces to $ 45,000

*** the profit reduced from $ 58,000 to $ 50,000 with a drop of 10 % volume of sale