Question

In: Finance

Assuming volume decreases 10%, what will revenues, variable costs and fixed costs be in year 2?

Consider the same company one more time:

Revenues: 500

Variable Costs 250

Fixed Costs 100

1. Assuming volume decreases 10%, what will revenues, variable costs and fixed costs

be in year 2? What will operating income be? What will the operating margin be in

year 2?

2. Assume in the above that variable costs were 150 and fixed costs were 200.

What will revenues, variable costs and fixed costs be in year 2? What will the

operating margin be in year 2?

Expert Solution

when volume decreases, only Revenues and variable costs gets affected and Fixed costs will remain constant

1. Revenues in Year 2 = Current Revenues * (1 - Decrease%) = 500 * 90% = $450

Variable Costs in Year 2 = Current Variable costs * (1 - Decrease%) = 250 * 90% = $225

Fixed Costs in Year 2 = Constant = $100

Operating Income = Revenues - Variable costs - fixed costs = $450 - 225 - $100 = $125

Operating Margin = Operating income / Revenues = $125 / 450 = 27.78%

2. Revenues in Year 2 = Current Revenues * (1 - Decrease%) = 500 * 90% = $450

Variable Costs in Year 2 = Variable costs * (1 - Decrease%) = 150 * 90% = $135

Fixed Costs in Year 2 = Constant = $200

Operating Income = Revenues - Variable costs - fixed costs = $450 - 135 - $200 = $115

Operating Margin = Operating income / Revenues = $115 / 450 = 25.56%

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jeff jeffy answered 2 years ago

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