Question

Can someone show me how this answer is 8,080 ? I keep coming up with the wrong number. Stellar Company has the following sales, variable cost, and fixed cost. If sales increase by $10,000 then their profit increases/decreases by how much?

Sales $50,000

Variable Costs $9,600

Fixed Costs $29,000

Answer is 8,080

Calculate the total cost of FC and VC for $50,000.

2) Calculate the increase in VC based on the % increase in Sales. VC/50000 * new sales

3) Add FC and VC based on new Sales $$

4) Compare total costs for both sales levels.

Answer 1

Present profit=

Sales = $50000

- Variable Cost = $9600

= Contribution = $40400

- Fixed cost = $29000

= Profit = $11400

Calculation of Profit Volume Ratio =

Contribution / Sales × 100

= $40400 / $50000 ×100 = 80.8%

Variable costs Ratio =

Variable cost / Sales ×100

$9600 / $50000 ×100 = 19.20%

If sales increase by $10000 then =

Sales ($50000 + $10000) = $60000

- Variable Cost ( $60000 × 19.20%) = $11520

= Contribution (60000 × 80.8%) = $48480

- Fixed cost = $29000

= Profit = $19480

Increase in Profit =

Profit when sales is $60000 = $19480

- Profit when sales is $50000 = $11520

Increase in Profit = $8080

Note -

Fixed cost always remain same irrespective of change in sales.

(A) Total Cost of Fixed cost and Variable cost for $50000 =

Total cost = Fixed cost + Variable Cost

= $29000 + $9600

= $38600

(B) Increase in Variable cost based on the % increase in sales =

Variable Cost on sales of $60000 =

= Variable cost / $50000 × $60000

= $9600 / $50000 × $60000

= $11520

Increase in Variable Cost =

Variable cost when

Sales is $60000 = $11520

- Sales is $50000 = $9600

Increase = $1920

(C) Total cost when sales is $60000 =

Total Cost = Variable Cost + Fixed cost

= $11520 + $29000

= $40520

(D) Total Cost for both sales =

Total cost when sales is $50000

Variable cost + Fixed cost

= $9600 + $29000

= $ 38600

Total cost when sales is $60000=

Variable cost + Fixed cost

$11520 + $29000

= $40520

Change in total costs=

When sales is $50000 = $38600

When sales is $60000 = $40520

Increase in Total cost = $1920