Question

a. What will the operating profit be? b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent? c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent? d. Suppose that fixed costs for the year are 10 percent lower than projected, and variable costs per unit are 10 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?

Answer 1

a. Operating Profit will be;

= Sales - Costs

= (270 - 120 ) * 5,000 - 300,000

= $450,000

b. Sales price increases by 20% = 270 * ( 1 + 20%)

= $324

Sales price decreases by 10% = 270 * ( 1 - 10%)

= $243

Operating profit if price decreases;

= (243 - 120 ) * 5,000 - 300,000

= $315,000

Operating profit if price increases;

= ( 324 - 120) * 5,000 - 300,000

= $720,000

c. Variable cost increases by 20% = 120 * ( 1 + 20%)

= $144

Variable Cost decreases by 10% = 120 * ( 1 - 10%)

= $108

Operating profit if variable cost decreases;

= (270 - 108 ) * 5,000 - 300,000

= $510,000

Operating profit if variable cost increases;

= ( 270 - 144 ) * 5,000 - 300,000

= $330,000

d. Fixed costs lower by 10% = 300,000 8 ( 1 - 10%)

= $270,000

Variable costs increase higher by 10% = 120 * ( 1 + 10%)

= $132

= (270 - 132) * 5,000 - 270,000

= $420,000

Operating profit will be down by $30,000 as a result of a 10% increase in variable costs and a 10% decrease fixed costs.