Question

LUDO m Uller Company's most recent contribution margin format income statement follows: Per Unit $15.00 9.00 Sales (20,000 units) Less: Variable expenses Contribution margin Less: Fixed expenses Profit Total $300,000 180,000 120,000 70,000 $ 50,000 $ 6.00 management is considering the following independent action to increase profit: increase selling price by 15% with no change in total variable costs. 2 Reduce variable costs to 50% of sales. Reduce fixed costs by $20,000. Instructions Calculate the profit to be earned to be earned under each alternative. Which action will produce the highest profit?

Answer 1

Correct Answer:

Requirement 1: increase in selling price by 15%, with no change in total variable cost

	Total	per unit
Sales (20000 units)	$ 345,000.00	$          17.25
Less: variable Expenses	$ 180,000.00	$            9.00
Contribution margin	$ 165,000.00	$            8.25
Less: Fixed Expenses	$    70,000.00
Profit	$    95,000.00

Requirement 2: Reduce variable cost to 50% of sale

	Total	per unit
Sales (20000 units)	$ 300,000.00	$          15.00
Less: variable Expenses	$ 150,000.00	$            7.50
Contribution margin	$ 150,000.00	$            7.50
Less: Fixed Expenses	$    70,000.00
Profit	$    80,000.00

Requirement 3: Reduce fixed cost by $ 20,000

	Total	per unit
Sales (20000 units)	$ 300,000.00	$          15.00
Less: variable Expenses	$ 180,000.00	$            9.00
Contribution margin	$ 120,000.00	$            6.00
Less: Fixed Expenses	$    50,000.00
Profit	$    70,000.00

Requirement 4:

Increase in selling price by 15%, with no change in Total variable cost , will produce the highest profit.

End of answer.

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