Question

                            AC Ltd

Sales ($10 per unit)             160,000

Variable Costs                     112,000

Contribution Margin           48,000

Fixed Costs                  (70,000)

Net Loss               (22,000)

1. If AC’s advertising increased by $9,000 and they wanted to achieve a Profit of $5,000, how much (in $) would their sales have to increase?
2. What would their Profit (or Loss) be if sales increased by 25% and fixed costs were reduced by 10%?

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Answer 1

Answer

1 current units sold = 160,000 / 10 = 16,000 units

Variable cost per unit = 112,000 / 16,000 = $7

Selling price per unit = $10

Advertising increase by $9,000, advertising is a fixed cost

Therefore

Total fixed cost = 70,000 + 9,000 = $79,000

Desired profit = $5,000

Sales to earn desired profit = (fixed cost + desired profit) / contribution margin ratio

Contribution margin ratio

= (48,000 / 160,000) × 100 = 30%

Sales to earn desired profit of $5,000

= (79,000 + 5,000) / 30% = $280,000

The company need a sale of $280,000 to get a desired profit of $5,000

Vompany need to increase the sales by $120,000 (from $160,000 to $280,000) to earn a desired profit of $5,000.

2 Sales increased by 25%

Sales = 16,000 + 25% = 20,000 units

Selling price = $10

Variable cost = $3

Fixed cost reduced by 10%

Fixed cost = 70,000 - 10% = $63,000

Income statement (variable costing)

Particulars	$
Sales (20,000 × 10)	200,000
Less variable cost (20,000 × 7)	140,000
Contribution margin	60,000
Fixed cost	63,000
Net loss	3,000

If the sales increased by 25% and fixed cost decreased by 10% , the company operating loss is $3,000.

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