Question

Derby Phones is considering the introduction of a new model of headphones with the following price and cost characteristics Sales price Variable costs Fixed costs 19 per unit 8 per unit 25,000 per month Assume that the projected number of units sold for the month is 5,500. Consider requirements (b). (C) and (d) independently of each other. Required: a. What will the operating profit be? 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 year 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

Answer:
a)
Particulars	Amount (in $ )
Sales (5,500 x 19 )	$ 104,500
Less: Variable Costs             ( 5,500 x $ 8)	($ 44,000)
Contribution Margin	$ 60,500
Less: Fixed Costs	($ 25,000)
Opearting Profit	$ 35,500
b)
If sales price decreases by 10% = $ 19 (-) 10% = $ 17.10
Particulars	Amount (in $ )
Sales (5,500 x $ 17.10 )	$ 94,050
Less: Variable Costs             ( 5,500 x $ 8)	($ 44,000)
Contribution Margin	$ 50,050
Less: Fixed Costs	($ 25,000)
Opearting Profit	$ 25,050
If sales price Increases by 20% = $ 19 (+) 20% = $ 22.80
Particulars	Amount (in $ )
Sales (5,500 x $ 22.80 )	$ 125,400
Less: Variable Costs             ( 5,500 x $ 8)	($ 44,000)
Contribution Margin	$ 81,400
Less: Fixed Costs	($ 25,000)
Opearting Profit	$ 56,400
c)
If Variable Cost per unit decreases by 10%                 = $ 8 (-) 10% = $ 7.20
Particulars	Amount (in $ )
Sales (5,500 x $ 19 )	$ 104,500
Less: Variable Costs             ( 5,500 x $ 7.20)	($ 39,600)
Contribution Margin	$ 64,900
Less: Fixed Costs	($ 25,000)
Opearting Profit	$ 39,900
If Variable Cost per unit Increases by 20%                 = $ 8 (+) 20% = $ 9.60
Particulars	Amount (in $ )
Sales (5,500 x 19 )	$ 104,500
Less: Variable Costs             ( 5,500 x $ 9.60)	($ 52,800)
Contribution Margin	$ 51,700
Less: Fixed Costs	($ 25,000)
Opearting Profit	$ 26,700
d)
Particulars	Amount (in $ )
Sales (5,500 x $ 19	$ 104,500
Less: Variable Costs             ( 5,500 x ( $ 8 + 10% )	($ 48,400)
Contribution Margin	$ 56,100
Less: Fixed Costs                   ( $ 25,000 (-) 10% )	($ 22,500)
Opearting Profit	$ 33,600
Change in Operating Profit              = ($ 35,500 (-) $ 33,600 ) x 12 month )              =   $ 1,900 x 12              = $ 22,800
Operating Profit will goes down by $ 22,800