Gilbert\'s Steel Part produces parts or the automobile indust The company has mo

Question

Gilbert's Steel Part produces parts or the automobile indust The company has monthly fixed expenses of $660 000 and a contribution margin o 80% of revenues. Gilbert feels like he's in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Gilbert's contribution margin has shrunk to 50% of revenues. The company's monthly operating income, prior to these pressures, was $164,000. Read the requirements. Requirement 1. To maintain this same level of profit, what sales volume (in sales revenue) must Gilbert now achieve? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach. Fixed expenses Operating income Contribution margin ratioTarget sales in dollars Round your answer up to the nearest whole dollar.) Gilbert must now achieve sales of $ 1,648,000 to maintain the same level of profit. Requirement 2. If monthly sales are $1,030,000, by how much will he need to cut fixed costs to maintain his prior profit level of $164,000 per month? Fixed expenses can only be S 660000 in order to maintain the prior profit level of $164,000 per month. Therefore, Gilbert will have to save at least S prior profit level 441333 per month in fixed costs by moving operations overseas if he plans to maintain his

Explanation / Answer

Requirement 1: Sales volume required for achieving same level of profit

(Fixed cost operating income) contribution margin

= (660000+164000)/50%= $ 1,648,000

Requirement 2:

If monthly sales are $ 1,030,000, in order to earn the same operating income of $ 164,000, the maximum fixed costs that he can afford is $ ( 1,030,000) x 50% - $ 164,000 = $ 351,000 per month.

Therefore, fixed costs need to be cut by $ 309,000(660000-351000) per month.

Fixed expenses can only be 351000 in order to maintain the prior profit level of 164000. Therefore, gilbert will have to save at least 309000 per month in fixed costs by moving operations overseas if he plans to maintain his prior profit level.

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