Roxbury Manufacturing Company is a privately owned business. Products manufactur
ID: 2450579 • Letter: R
Question
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 10% decline in sales has resulted in a 20% 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
Sales and variable costs have declined by 10% respectively. However the fixed costs have remained the same at $500000 which are not influenced by change in sales volume and hence the decline in profit of 20% is greater than decline in sales of 10%.
The company should either try increasing sales volume or take measures to reduce fixed costs
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