Question

Based on the following information, if unit sales decrease by 12%, how much will fixed costs have to be reduced by to maintain the current operating profit?

Sales $32 per unit, $78k Total

less variable expenses 16 per unit, 34320 total

contribution margin 16 per unit, 34320 total

less fixed expenses 18,000 total

operation profit $18,000 total

a. $2,400

b. $9,360

c. $1,800

d. $3,000

Answer 1

Option b) $ 9,360

Given information,

Unit sales decreased by 12%,

Selling price per unit = $32 * ( 100 - 12) / 100

= $ 32 * 88/100

= $ 28.16 per unit

Particulars	Amount
Sales @ $ 28.16	68640
Less:
Variable expenses @$16	(34320)
Contribution margin	34320

Hiw much fixed cost have to be reduced inorder to maintain the current operating profit

Current operating profit = $ 25,680

Fixed expenses = Contribution margin - Operating profit

= $34,320 - $25,680

= $ 8,640

After the reduction of selling price per unit, fixed cost is reduced to $ 9,360 ( 18000 - 8640).

Working note :

Calculation of Income statement before reduction in selling price per unit

Particulars	Amount
Sales @ $32 per unit	78,000
Less:
Variable expenses @ $16 per unit	(34,320)
Contribution margin @ $ 16 per unit	43680
Less:
Fixed expenses	(18000)
Operating profit	25680