E7-26A (similar to Question Help Stewart\'s Steel Parts produces parts for the a

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E7-26A (similar to Question Help Stewart's Steel Parts produces parts for the automobile ndustry. The company has monthly ed expenses of S670 000 and a contribution margin of 85% of revenues. Stewart feels like he's in a giant squeeze play. The automotive manufacturers are demanding lower p ces, and he steel producers have increased raw mater al costs. Stewart's contribution margin has shrunk to 65% of revenues The company's monthly operating income, pr or to tese pressures, was $214,000. Read the requrements. 6 Requirements Requirement 1. To maintain this same level of profit, what sales volume (in sales revenue) must Stewart now achieve? Begin by identifying the formula to compute the sales in units at various levels of operating income using the contribution margin approach 1. To maintain this same level of profit, what sales volume in sales revenue) must Target sales in dollars Stewart now achieve? 2.Stewart believes that his monthly sales revenue will only go as high as $1,040,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are S1,040,000, by how much will he need to cut fixed costs to maintain his prior profit level of $214,000 per month? Print Done

Explanation / Answer

Answer 1 To maintain same level of profit , sales revenue must Stewat now achieve , Fixed Cost per month = $670000 Net operating Income per month = $214000 Required Contribution Margin = Fixed cost + required Net operating income = $670000 + $214000 = $8,84,000 Revenue = Required Contribution Margin / New Contribution Margin % = $884000 / 65% = $13,60,000 Stewart must achieve $13,60,000 revenue to maintain same level of profit. Answer 2 New level of Fixed cost = Contribution Margin - required net operating income Contribution margin = Monthly sales revenue * Contribution margin % = $1040000 * 65% = $676000 Required net operating income per month = $214000 New level of Fixed cost = $676000 - $214000 = $462000 Cut in fixed cost required to maintain same level of profit = $670000 - $462000 = $2,08,000

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