Question

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

Sales price	$	17	per unit
Variable costs		8	per unit
Fixed costs		20,000	per month

Assume that the projected number of units sold for the month is 6,500. 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

Requirement a

Derby Phones
Income Statement
(6500 Units)
		Working
Sales Revenue	$ 110,500.00	(6500x17)
Less: Variable Cost	$    52,000.00	(6500x8)
Contribution Margin	$    58,500.00	(110500-52000
Fixed Cost	$    20,000.00
Operating Profit	$    38,500.00

Requirement b

Operating profit at price of $17		$         38,500.00
Decrease in revenue after 10% Decrease in price	(6500*1.7)	$          11,050.00
Change in profit die to price decrease		$          27,450.00

Operating profit at price of $17		$          38,500.00
Increase in revenue after 20% Increase in price	(6500*3.4)	$          22,100.00
Change in profit die to price decrease		$          60,600.00

Explanation

Since only price is changing and other factors remains the same the effect of change in operating income is only due to change in price.

Requirement c

Operating profit at Variable cost of 8 per unit		$      38,500.00
Decrease in revenue after 10% Decrease in variable cost	(6500*0.8)	$        5,200.00
Change in profit die to Decrease in variable cost		$      43,700.00

Other things remaining the same if Variable cost is decreasing then operating profit will increase.

Operating profit at Variable cost of 8 per unit		$      38,500.00
Increase in revenue after 20% Increase in Variable cost	(6500*1.6)	$      10,400.00
Change in profit die to Increase in variable cost		$      28,100.00

Other things remaining the same if Variable cost is increasing, operating profit will Decrease.

Requirement d

Change in Fixed cost

Current Fixed cost	$ 20,000.00
10% Decrease	$    2,000.00
Decreased fixed cost	$ 18,000.00

Change in Variable Cost

Current variable Cost	8 per Unit
10% Increase	0.8 per Unit
Increased Variable cost per Unit	8.8 per Unit

Income statement with updated data

Derby Phones
Income Statement
(6500 Units)
		Working
Sales Revenue	$ 110,500.00	(6500x17)
Less: Variable Cost	$    57,200.00	(6500x8.8)
Contribution Margin	$    53,300.00	(110500-52000
Fixed Cost	$    18,000.00	(20000-2000)
Operating Profit	$    35,300.00

Answer

If Fixed cost decrease by 10% and Variable cost increase by 10% then the Operating profit will go down by $3200 and will come down from $38500 to $ 35300.