Question

Roger's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $640,000 and a contribution margin of 70% of revenues. Roger feels like he's in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Roger's contribution margin has shrunk to 40% of revenues. The company's monthly operating income, prior to these pressures, was $102,000. Read the requirements. Requirement 1. To maintain this same level of profit, what sales volume in sales revenue) must Roger now achieve? Begin by identifying the formula to complete the sales in units at various levels of operating income using the contribution margin approach. Fixed expenses + Operating income ) Contribution margin ratio - Target salos in dollars (Round your answer up to the nearest whole dollar.) Roger must now achieve sales of $ 1,855,000 to maintain the same level of profit. Requirement 2. If monthly sales are $1,060,000, by how much will he need to cut fixed costs to maintain his prior profit level of $102,000 per month? Fixed expenses can only be $ will have to save at least $ prior profit level. 1298500 in order to maintain the prior profit level of $102,000 per month. Therefore, Roger 200000 per month in fixed costs by moving operations overseas if he plans to maintain his

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer 2 Requirement 1) B Formula 4 (Fixed expenses +Operating income) / Contribution Margin Ratio = Target Sales in Dollars 5 Sales to achieve same level of profit 5 = (640000+102000)/40% 7 = $ 1855000 3 Thus the correct answer is $ 1855000 O Requirement 2) 1 1) 2 Desired fixed expenses to attain desired profit 3 Desired Fixed expenses = (total sales * contributionmargin ratio) - desired operating income 4 = (1060000*40%) - 102000 5 = $ 322000 6 Thus fixed expenses can only be $ 322000 8 2) 9 Saving infixed cost need to be done 0 = Earlier fixed cost-desired fixed cost -1 = 640000 - 322000 -2 = $ 318000 -3 Thus the saving in fixed cost atleast by $ 318000 Sheet78 Sheet79 Sheets Sheet81 Sheet82 Sheet83 Sheet85 (31 Sheet2