Question

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           $15 per unit

Variable costs    5 per unit

Fixed costs          50,000 per month

Required:

1. What number must Warner sell per month to break even? 5,000

b. What number must Warner sell per month to make an operating profit of $34,000? $8,400

Assume that the company plans to sell 9,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

Required:

      c. What will be the operating profit? $40,000

d. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?

Sales price decreases by 10 percent: Operating profit decreases by $13,500 Sales price increases by 20 percent: Operating profit increases by $27,000

e. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

Variable costs per unit decrease by 10 percent: Operating profit increases by $4,500 Variable costs per unit increase by 20 percent: Operating profit decreases by

f. Suppose that fixed costs for the year are 20 percent lower than projected, and variable costs per unit are 20 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?

Operating profit increases by $

Answer 1

Sale Price	15.00
Variable cost	(5.00)
Contribution per unit	10.00
Fixed Cost	50000
Break even point=	Fixed cost/contribution per unit
Break even point=	=50000/10
Break even point=	5,000.00
Operating profit required	34000
Required unit=	(50000+34000)/10
Required unit=	8400
No of units are 9000
	Per unit	9000	Sale price decrease by 10%	Sale price decrease by 10%	Sale price increase by 20%	Sale price increase by 20%
Sale Price	15.00	135,000.00	13.50	121,500.00	18.00	162,000.00
Variable cost	(5.00)	(45,000.00)	(5.00)	(45,000.00)	(5.00)	(45,000.00)
Contribution per unit	10.00	90,000.00	8.50	76,500.00	13.00	117,000.00
Less Fixed Cost		(50,000.00)		(50,000.00)		(50,000.00)
Operating profit		40,000.00		26,500.00		67,000.00
Old profit				(40,000.00)		(40,000.00)
Impact				(13,500.00)		27,000.00
	Per unit	9000	variable cost decrease by 10%	variable cost decrease by 10%	variable cost increase by 20%	variable cost increase by 20%
Sale Price	15.00	135,000.00	15.00	135,000.00	15.00	135,000.00
Variable cost	(5.00)	(45,000.00)	(4.50)	(40,500.00)	(6.00)	(54,000.00)
Contribution per unit	10.00	90,000.00	10.50	94,500.00	9.00	81,000.00
Less Fixed Cost		(50,000.00)		(50,000.00)		(50,000.00)
Operating profit		40,000.00		44,500.00		31,000.00
Old profit				(40,000.00)		(40,000.00)
Impact				4,500.00		(9,000.00)
	Per unit	9000	Impacted	9000
Sale Price	15.00	135,000.00	15.00	135,000.00
Variable cost: 20% higher than projected	(5.00)	(45,000.00)	(6.00)	(54,000.00)
Contribution per unit	10.00	90,000.00	9.00	81,000.00
Less Fixed Cost: 20% less than projected		(50,000.00)	(40,000.00)	(40,000.00)
Operating profit		40,000.00		41,000.00
Old profit				40,000.00
Impact				1,000.00	increase by 1000