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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 anew baseball cap for sales by local vendors. The company hascollected the following price and cost characteristics:


 


    Sales price$12per unitVariablecosts 2per unitFixed costs 40,000per month

Assume that the company plans to sell 6,000 units permonth. Consider requirements (b), (c), and (d)independently of each other.


 

What is the impact on operating profit if variablecosts per unit decrease by 15 percent? Increase by 30percent?


 

Answer & Explanation Solved by verified expert
4.2 Ratings (765 Votes)

Calculation of impact on operating profit if variable costs per unit decrease by 15 percent
Current Variable costs per unit decrease by 15 percent Increase / (decrease) in operating profit
Per Unit Total Per Unit Total
Sales $12.00 $72,000.00 $12.00 $72,000.00
Less : Variable cost $2.00 $12,000.00 $1.70 $10,200.00
Contribution Margin $10.00 $60,000.00 $10.30 $61,800.00
Less : Fixed Cost $40,000.00 $40,000.00
Operating Income $20,000.00 $21,800.00 $1,800.00
Calculation of impact on operating profit if variable costs per unit increase by 30 percent
Current Variable costs per unit increase by 30 percent Increase / (decrease) in operating profit
Per Unit Total Per Unit Total
Sales $12.00 $72,000.00 $12.00 $72,000.00
Less : Variable cost $2.00 $12,000.00 $2.60 $15,600.00
Contribution Margin $10.00 $60,000.00 $9.40 $56,400.00
Less : Fixed Cost $40,000.00 $40,000.00
Operating Income $20,000.00 $16,400.00 -$3,600.00

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