Question

Required information Exercise 3-31 and 3-32 (Algo) (LO 3-1) (The following information applies to the questions displayed below.) Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors. The company has collected the following price and cost characteristics. $ Sales price Variable costs Fixed costs 16 per unit 4 per unit 51,000 per month Exercise 3-32 (Algo) Basic Decision Analysis Using CVP (LO 3-1) Assume that the company plans to sell 6,000 units per month. Consider requirements (b), (c), and (d) independently of each other. Required: a. What will be the operating profit? b. What is the impact on operating profit if the sales price decreases by 15 percent? Increases by 30 percent? c. What is the impact on operating profit if variable costs per unit decrease by 15 percent? Increase by 30 percent? d. Suppose that fixed costs for the year are 15 percent lower than projected, and variable costs per unit are 15 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

1) compute operating profit

Particular	per unit	amount ($)
Sale(6000×12)72000	$16	1152000
(-) variable expenses	$4	(288000)
Contribution		864000
(-) fixed expenses		(612000)
operating profit		252000

2)if sale price decreases by 15%

   $16-15%=13.6, new selling price= 13.6

If sales price decreases but variable cost per Will not change and remains constant therefore

Particular	per unit	amount ($)
Sale (6000×12)72000	13.6	979200
(-) variable expenses	4	(288000)
Contribution		691200
(-) fixed expenses		(612000)
Operating income		79200

if sales price increase by 30%

   $16+30% =$20.8, new selling price= $20.8

Particular	per unit	amount ($)
Sales (6000×12)72000	$20.8	1497600
(-) variable expenses	$4	(288000)
Contribution		1209600
(-) fixed expenses		(612000)
operating income		597600

3)if variable cost per unit decrease by 15%

   $4-15%=$3.4, New variable price per unit=$3.4

Particular	per unit	amount ($)
Sales (6000×12)72000	$16	1152000
(-) variable cost	$3.4	(244800)
Contribution		907200
(-) fixed expenses		(612000)
Operating income		295200

if variable cost per unit increase by 30%

  $4+30%=$5.2, then New variable cost per unit=$5.2

particular	per unit	amount ($)
Sales (6000×12)72000	$16	1152000
(-) variable expenses	$5.2	(374400)
Contribution		777600
(-) fixed cost		(612000)
Operating income		165600

3) if Fixed costs decrease by 15% , variable cost per unit increase by 15%

New fixed cost= $51000×12-15%=$520200

New variable cost per unit=$4+15%=$4.6

Particular	per unit	amount ($)
Sales(6000×12)72000	$16	1152000
(-) variable expenses	$4.6	(331200)
Contribution		820800
(-) fixed expenses		(520200)
Operating income		300600

Therefore profit had increase

$300600 - $252000= $48600

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