Kaizer Plastics produces a variety of plastic items for packaging and distributi
ID: 400287 • Letter: K
Question
Kaizer Plastics produces a variety of plastic items for packaging and distribution. One item, container #145, has had a low contribution to profits. Last year, 23,500 units of container #145 were produced and sold. The selling price of the container was $29 per unit, with a variable cost of $18 per unit and a fixed cost of $70,000 per year. The company is currently considering ways to improve profitability. Management believes that it can reduce their variable cost to 90 percent of their current value. Assuming all other costs equal, by how much would profits increase?
Explanation / Answer
Given values:
Number of units produced = 23,500
Selling price of the container = $29 per unit
Variable cost = $18 per unit
Fixed cost = $70,000 per year
Solution:
Profit is calculated as,
Profit = Total Revenue - Total costs
Profit = (Selling price x Number of units sold) - [Fixed cost + (Variable cost x Number of units sold)]
Putting the given values in the above formula, we get,
Profit = ($29 x 23,500) - [$70,000 + ($18 x 23,500)]
Profit = $681,500 - $493,000
Current profit = $188,500
Now, if the Variable cost is reduced to 90 percent of its current value,
New Variable cost = (90/100) x $18 per unit
New Variable cost = $16.2
Profit = (Selling price x Number of units sold) - [Fixed cost + (Variable cost x Number of units sold)]
Profit = ($29 x 23,500) - [$70,000 + ($16.2 x 23,500)]
Profit = $681,500 - $450,700
New profit = $230,800
Increase in profit is calculated as,
Profit increase = New profit - Current profit
Profit increase = $230,800 - $188,500
Profit increase = $42,300
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