Derby Phones is considering the introduction of a new model of headphones with t
ID: 2336820 • Letter: D
Question
Derby Phones is considering the introduction of a new model of headphones with the following price and cost characteristics: $ 270 per unit Sales price Variable costs Fixed costs 120 per unit 300,000 per month Assume that the projected number of units sold for the month is 5,000. Consider requirements (b), (c), and (d) independently of each other. Required a. What will the operating profit be? Operating proft b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent? Sales price decreases by 10 percent: Operating profit by Sales price increases by 20 percent: Operating profit byExplanation / Answer
Solution:-
(a).Operating profit :-
= 5,000 * 270
= $1,350,000
= 5,000 * 120
= $600,000
= 1,350,000 - 600,000
= $750,000
= 750,000 - 300,000
= $450,000
(b).Operating profit when selling price decreased by 10% and increased by 20% :-
sales price by 10% = 270 - (270 * 10%)
= 270 - 27
= $243
sales price by 10% = $243
sales price by 20%= 270 + (270 *20%)
= 270 + 54
= $324
sales price by 20% = $324
= 5,000 * 243
= $1,215,000
= 5,000 * 324
= $1,620,000
= 5,000 * 120
= $600,000
= 5,000 * 120
= $600,000
= 1,215,000 - 600,000
= $615,000
= 1,620,000 - 600,000
= $ 1,020,000
= 615,000 - 300,000
= $315,000
= 1,020,000 - 300,000
= $720,000
operating profit = 450,000 - 315,000
= $135,000
Decreased operating profit = $135,000
operating profit = 720,000 - 450,000
= $270,000
Increased operating profit = $270,000.
(C).Variable cost decreased by 10% and increased by 20%:-
variable cost decreased by 10% = 120 - (120 * 10%)
= 120 - 12
= $108
variable cost decreased by 10% = $108
variable cost increased by 20% = 120 + (120 * 20% )
= 120 + 24
= $144
variable cost increased by 20% = $144
= 5,000 * 270
= $1,350,000
= 5,000 * 270
= $1,350,000
= 5,000 * 108
= $540,000
= 5,000 * 144
= $720,000
= 1,350,000 - 540,000
= $810,000
= 1,350,000 - 720,000
= $630,000
= 810,000 - 300,000
= $510,000
= 630,000 - 300,000
=$330,000
operating profit = 510,000 - 450,000
= $60,000
Decreased operating profit = $60,000
operating profit = 450,000 - 330,000
= $120,000
increased operating profit = $120,000
(d).
Fixed cost decreased by 20%:-
Fixed cost decreased by 20% = 300,000 - (300,000 * 20%)
= 300,000 - 60,000
= $240,000
Fixed cost decreased by 20% = $240,000
variable cost increases by 10% = 120 + (120 * 10%)
= 120 + 12
= $132
variable cost increases by 10% = $132
= 5,000 * 270
= $1,350,000
= 5,000 *132
= $660,000
= 1,350,000 - 660,000
= $690,000
= 690,000 - 240,000
= $450,000
Sales= 5,000 * 270
= $1,350,000
Variable costs= 5,000 * 120
= $600,000
Contribution margin = sales - variable cost= 1,350,000 - 600,000
= $750,000
Fixed cost $300,000 Operating profit = contribution margin - fixed cost= 750,000 - 300,000
= $450,000
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