Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors....

Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors. The company has collected the following price and cost characteristics.


Sales price	$	17	per unit
Variable costs		3	per unit
Fixed costs		63,000	per month

Assume that the company plans to sell 7,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

Required:

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?

Solutions

Expert Solution

before considering the changes in the costs the copany have a profit of $35000 and after considering the changes in the costs the company have an operating profit of $39200.from this, the impact on these cost changes have on operating profit is increased by $4200 ($39200-$35000).calculations are given below

income statement 1

	$
sales revenue	119000
variable cost	21000
fixed cost	63000
operating profit	35000

sales revenue=7000*$17=$119000

variable cost=7000*$3=$21000

fixed cost=$63000

operating profit=$119000-$21000-$63000=$35000

income statement 2

	$
sales revenue	119000
variable cost	23100
fixed cost	56700
operating profit	39200

sales revenue=7000*$17=$119000

variable cost=7000*$3.3=$23100

variable costs per unit are 10 percent higher than projected, so unit price is $3.3(3*110%)

fixed cost=$56700

fixed costs for the year are 10 percent lower than projected, so fixed cost is $56700(63000*90%)

operating profit=$119000-$23100-$56700=$39200

ekkarill92 answered 1 year ago

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