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 22 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 (6). (c), and (d) independently of ench 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? Complete this question by entering your answers in the tabs below.

Answer 1

Answer

Sales Price = $ 22 per unit

Variable Cost = $ 8 per unit

Fixed Cost = 25,000 per month

Projected Number of units Sold = 5,500 For the month

a. Operating Profit

Total Revenue ( $22 * 5,500 Unit)	$ 1,21,000
Less: Variable Cost ($ 8 * 5,500 Unit)	($ 44,000)
Less : Fixed Cost	($ 25,000)
Operating Profit	$ 52,000

b.

• Operating Profit if Sales Price decrease by 10%

Sales Price ( $ 1,21,000 * 90%)	$ 1,08,900
Less: Total Cost ($ 44,000 + $ 25,000)	($ 69,000)
Operating Profit	$ 39,900

• Operating Profit if Sales Price Increase by 20%  

Sales Price ( $ 1,21,000 * 120%)	$ 1,45,200
Less: Total Cost ($ 44,000 + $ 25,000)	($ 69,000)
Operating Profit	$76,200

c.

• Operating Profit if variable cost per unit decreases by 10%

Variable Cost per unit = $8 * 90% = $ 7.2

Total variable Cost = $7.2 * 5,500 Units = $39,600

Sales Price	$ 1,21,000
Less: Total Cost ($ 39,600+ $ 25,000)	($ 64,600)
Operating Profit	$56,400

• Operating Profit if variable cost per unit increases by 20%

Variable Cost per unit = $8 * 120% = $ 9.6

Total variable Cost = $ 9.6 * 5,500 Units = $ 52,800

Sales Price	$ 1,21,000
Less: Total Cost ($ 52,800 + $ 25,000)	($ 77,800)
Operating Profit	$43,200

d.

• Operating profit if Fixed costs for the year are 10 % lower than projected, and variable costs per unit are 10 % higher than projected.

1) Fixed costs for the year are 10 % lower than projected

Fixed Cost = $ 25,000 * 90% = $ 22,500

2) Variable costs per unit are 10 % higher than projected

Variable costs = $ 44,000 * 110% = $ 48,400

Total Cost (1 + 2) =  $ 22,500 + $ 48,400 = $ 70,900

Sales Price	$ 1,21,000
Less: Total Cost	($ 70,900)
Operating Profit	$ 50,100

Note:

Difference in operating profit between projected and modified = $ 52,000 - $ 50,100 = $ 1,900

The Operating Profit Gone down by $1,900 due to modified cost.