Question

What are 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 19 per unit variable cost 3 per unit fixed cost 54,000 per month assuming that the company plans to sell 8000 per units. What is the impact on operating profit if the sales price decreases by 5% or increases by 10%?

Answer 1

The impact on operating profit if the sales price decreases by 5% or increases by 10% can be calculated using the following formula:

Operating profit = (Sales Price - Variable Cost) * Quantity - Fixed Cost

First, we need to calculate the current operating profit using the given information:

Sales Price = $19

Variable Cost = $3

Fixed Cost = $54,000

Quantity = 8,000

Operating profit = ($19 - $3) * 8,000 - $54,000 = $104,000

Now, we can use this information to calculate the impact on operating profit if the sales price decreases by 5%:

Decrease in Sales Price = $19 * 0.05 = $0.95

New Sales Price = $19 - $0.95 = $18.05

New Operating profit = ($18.05 - $3) * 8,000 - $54,000 = $100,200

Decrease in operating profit = $104,000 - $100,200 = $3,800

And if the sales price increases by 10% :

Increase in Sales Price = $19 * 0.1 = $1.9

New Sales Price = $19 + $1.9 = $20.9

New Operating profit = ($20.9 - $3) * 8,000 - $54,000 = $111,200

Increase in operating profit = $111,200 - $104,000 = $7,200

In conclusion, if the sales price decreases by 5%, the operating profit will decrease by $3,800 and if the sales price increases by 10%, the operating profit will increase by $7,200.