CASE 2 Roxbury Manufacturing Company by Khursheed Omer Roxbury Manufacturing Com

Question

CASE 2 Roxbury Manufacturing Company by Khursheed Omer Roxbury Manufacturing Company is a privately owned business. Products manufactured by Roxbury had been doing very well until the year 2011. The last two years have seen a steady decline in sales and profit. If this declining trend continues, the company might come under financial distress. Income statements for the last two years are given below. Year 1 Percent Year 2 Percent Sales $ 4,000,000 100 $ 3,600,000 100 Less Variable Expenses $ 3,000,000 75 $ 2,700,000 75 -------------------------------------------------------------------- Total Contribution Margin $ 1,000,000 25 $ 900,000 25 Less Fixed Expenses $ 500,000 $ 500,000 --------------------------------------------------------------------- Net Income before taxes $ 500,000 $ 400,000 ========================================== Mr. Creighton, the owner of the company is baffled that only a ten percent decline in sales has resulted in a twenty percent decline in profits. He asks you to explain to him how in spite of maintaining efficiency in operations by keeping variable expenses and contribution margin at the same percentage level, he has experienced a greater percentage decline in profits.

Explanation / Answer

The variable cost and contribution margin is same inspite of this there is decrease in profit this is because of fixed cost, as fixed cost remains same with a range of activities so if there is decrease in sale but that won't affect fixed cost it will remain same. If more units are produced fixed cost decrease per unit and if less units are produced fixed cost rate per unit increases.

Because the fixed cost remain same any decrease in sales may affect the net income in a greater manner due to fixed cost

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