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Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors....

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Accounting

Warner Clothing is considering the introduction of a newbaseball cap for sales by local vendors. The company has collectedthe following price and cost characteristics:

Sales price$15per unit
Variable costs5per unit
Fixed costs50,000per month

Required:

a. What number must Warner sell per month tobreak even?

b. What number must Warner sell per month tomake an operating profit of $34,000?

Assume that the company plans to sell 9,000 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 ifthe sales price decreases by 10 percent? Increases by 20percent?

c. What is the impact on operating profit ifvariable costs per unit decrease by 10 percent? Increase by 20percent?

d. Suppose that fixed costs for the year are 20percent lower than projected, and variable costs per unit are 20percent higher than projected. What impact will these cost changeshave on operating profit for the year? Will profit go up? Down? Byhow much?

Answer & Explanation Solved by verified expert
4.4 Ratings (662 Votes)

a) BEP(units) = fixed cost/contribution margin per unit
50,000/(15-5)
5000 answer
b) BEP(units)          = (fixed cost + target profit)/contribution margin per unit
(50000+34000)/10
8400
c-a) operating profit
contribution margin (9000*10) 90,000
less : fixed expense 50,000
operating profit 40,000
c-b)
selling price per unit 13.5 18
less variable cost per unit 5 5
contribution margin per unit 8.5 13
units sold 9000 9000
total contribution margin 76500 117000
less fixed expense 50,000 50,000
operating profit 26,500 67,000
decrease in operating profit 13,500
increase in operating profit 27,000
c-c)
selling price per unit 15 15
less variable cost per unit 4.5 6
contribution margin per unit 10.5 9
units sold 9000 9000
total contribution margin 94500 81000
less fixed expense 50,000 50,000
operating profit 44,500 31,000
increase in operating profit 4,500
Decrease in operating profit 9,000
c-d)
selling price per unit 15
less variable cost per unit 6
contribution margin per unit 9
units sold 9000
total contribution margin 81000
less fixed expense 40,000
operating profit 41,000
increase in operating profit 1,000

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