Question

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

Sales price	$	19	per unit
Variable costs		7	per unit
Fixed costs		30,000	per month

Assume that the projected number of units sold for the month is 6,000. 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? (Do not round intermediate calculations.)

c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent? (Do not round intermediate calculations.)

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? (Do not round intermediate calculations.)

Answer 1

A.Operating profit

Particular	Amount
Sales	114000
Less: Variable cost	42000
Contribution	72000
Less: Fixed cost	30000
Operating Profit	42000

B.

Sales price decreased by 10%

Particular	Amount
Sales(6000*17.1)	102600
Less: Variable cost	42000
Contribution	60600
Less: Fixed cost	30000
Operating profit	30600

Sales price increased by 20%

Particular	Amount
Sales(6000*22.8)	136800
Less: variable cost	42000
Contribution	94800
Less: Fixed cost	30000
Operating profit	64800

C.

Variable cost decreased by10%

Particular	Amount
Sales	114000
Less: Variable cost(6000*6.3)	37800
Contribution	76200
Less: Fixed cost	30000
Operating profit	46200

Variable cost increased by 20%

Particular	Amount
Sales	114000
Less: Variable cost(6000*8.4)	50400
Contribution	63600
Less: Fixed cost	30000
Operating profit	33600

D.

Fixed cost reduced by 10% and Variable cost increased by 10%

Particular	Amount
Sales	114000
Less Variable cost(6000*7.7)	46200
Contribution	67800
Less: Fixed cost(30000-30000*10%)	27000
Operating profit	40800