Question

Chapter 3 Fundamentals of Cost-Volume-Profit Analysis 3-31. Basic Decision Analysis Using CVP 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. LO 3-1) Sales price............. Variable costs .......... Fixed costs ............ $ 15 per unit 3 per unit 42,000 per month Required a. What number must Warner sell per month to break even? b. What number must Warner sell per month to make an operating profit of $30,0007 3-32. Basic Decision Analysis Using CVP (LO 3-1) Refer to the data for Warner Clothing in Exercise 3.31. Assume that the company plans to sell 5.000 units per month. Consider requirements (b), (e), and (d independently of each other. Required a. What will be the operating profit? b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent? c. What is the impact on operating profit if variable costs per unit decrease by 10 percent Increase by 20 percent? d. Suppose that fixed costs for the vear 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?

Answer 1

3-31.

1. Sales-             15 per unit

V.C    -                  3 per unit

So, contribution= 12

Number of units to be produced to break even= 42000/12=3500

Then, sales- 52500

Less: v.c      -10500

Less: F.C     - 42000

PROFIT         =     0

2. Contribution=12

Number of units to be sold to earn 30000 profit=42000+30000/12=6000

Then,   sales- 90000

Less: V.C      - 18000

Less: F.C     -    42000

PROFIT         =  30000

3-32:

Sales          - 75000

Less: V.C      - 15000

Less: F.C     - 42000

PROFIT         =   18000

2. When sale price decreases and increases

                                                                Decreases By 10%            Increases by 20%

Sales          - 67500                                    90000

Less: V.C      -                                      15000                                    15000

Less: F.C     -                                       42000                                    42000

PROFIT         =                                     10500                                    33000

3. Variable cost increases and decreases

                                                             Decreases by 10%            Increases by 20%

Sales          - 75000                                    75000

Less: V.C      -                                      13500                                    18000

Less: F.C     -                                       42000                                    42000

PROFIT         =                                     19500                                    15000

4. Fixed costs are 10% lower than projected and variable costs are 10% higher than projected

Then,

Sales          -    75000

Less: V.C      -   16500  

Less: F.C     -    37800

PROFIT         =   20700

Here, we can see that when fixed cost decreased by 10% and variable costs increased by10% the profit had gone up to 20700 which is 2700 more than the previous