Question

Maize Plastics manufactures and sells 90 bottles per day. Fixed costs are $25,000 and the variable costs for manufacturing 90 bottles are $18,000. Each bottle is sold for $1000. How would the daily profit be affected if the daily volume of sales drop by 2047 profits are reduced by $32,600 profits are reduced by $18,000 profits are reduced by $14,400 profits are reduced by $3600

Answer 1

Variable costs per unit

= Total variable costs / Number of units

= $18,000 / 90

= $200 per bottle

Contribution margin per bottle

= Selling price per bottle – Variable costs per bottle

= $1,000 - $200

= $800 per bottle

Total Contribution margin for 90 bottles

= Number of bottles x Contribution margin per unit

= 90 x $800

= $72,000

Profit per day

= Contribution – Fixed costs

= $72,000 - $25,000

= $47,000

New Volume of sales

= Old Volume x ( 1 – Reduction percentage)

= 90 x ( 1 – 0.20)

= 90 x 0.80

= 72 bottles

Total contribution on new sales volume

= New Volume x Contribution margin per unit

= 72 x $800

= $57,600

New Profit

= Contribution – Fixed costs

= $57,600 - $25,000

= $32,600

So, reduction in profit

= Old – New

= $47,000 - $32,600

= $14,400

So, as per above discussion, option C is the correct option