Question

Cindy operates Birds-R-Us, a small store manufacturing and selling 200 bird feeders per month. Cindy's monthly total fixed costs are $800, and her monthly total variable costs are $1,500. If for some reason Cindy's variable cost decreased to $1,000, then her:__________.

Answer 1

Net profit would increase.

Step-by-step explanation:

Variable costs are a determinant of profitability. Going by the contribution margin method, net profit is obtained by deducting the fixed cost from the total contribution margin.

The total contribution is revenue minus variable cost. For R U, the revenue will be selling price multiplied units sold. If variable costs reduce, contribution margin will increase. If selling price and units sold the same remain constant, a reduction in variable costs would lead to an increase in net profits.