Question

You have been provided with the following information

Sales $90,000
Less Variable Exp (54,000)
Contribution margin 36,000
Less Fixed Exp (24,000)
Operating Profit $12,000 If sales decrease by 10%, what level of fixed expenses will maintain the current operating profit?

Answer 1

$15000.

Step-by-step explanation:

Given: Sales $90,000

Less Variable Exp (54,000)

Contribution margin 36,000

Less Fixed Exp (24,000)

Operating Profit $12,000

As sales decreases by 10%.

∴ Sales=
`Current\ sales- (current\ sales * 10%)`

Sales=
`\$ 90000- (\$ 90000 * (10)/(100) )`

Solving and opening the parenthesis.

Sales=
`\$90000- \$ 9000= \$ 81000`

Sales= $81000.

Now, computing to get fixed expense at which operating profit will remain same.

Contribution margin= sales- variable expense

⇒ Contribution margin=
`\$ 81000-\$ 54000= \$ 27000`

Fixed expense= Contribution margin - operating profit

`Fixed\ expense= \$ 27000-\$ 12000= \$ 15000`

∴ Fixed expense will $ 15000 at which operating profit will remain same.