Cambridge, Inc., is considering the introduction of a new calculator with the fo

Question

Cambridge, Inc., is considering the introduction of a new calculator with the following price and cost characteristics: Assume that the projected number of units sold for the year is 7,000. Consider requirements (b), (c) and (d) independently of each other. What will the operating profit be? What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent? What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

Explanation / Answer

Cambridge Inc. a. Calculation of Operating Profit (Activity level 7,000 units) Particulars Per unit cost Total cost Sales $                 19 $                 1,33,000 Variable Cost $                   7 $                    49,000 Contribution $                 12 $                    84,000 Fixed Cost $                    30,000 Net Operating Profit $                    54,000 b.Impact on operating profit if the sales price decreases by 10 percent? Increases by 20 Sales price decreases by 10% Sales price increases by 20% Particulars Per unit cost Total cost Per unit cost Total cost Sales $             17.10 $                 1,19,700 $        22.80 $                           1,59,600 Variable Cost $                   7 $                    49,000 $              7 $                              49,000 Contribution $                 10 $                    70,700 $            16 $                           1,10,600 Fixed Cost $                    30,000 $                              30,000 Net Operating Profit $                    40,700 $                              80,600 Answer Sales price decrease by 10 percent Operating Profit decreases by 24.63% $ 13300/ $ 54000 Sales price increases by 20 percent Operating Profit increases by 49.26% $ 26600/ $ 54000 c.Impact on operating profit if the variable cost per unit decreases by 10 percent? Increases by 20 variable cost per unit decreases by 10% Variable cost per unit increases by 20% Particulars Per unit cost Total cost Per unit cost Total cost Sales $             19.00 $                 1,33,000 $        19.00 $                           1,33,000 Variable Cost $               6.30 $                    44,100 $          8.40 $                              58,800 Contribution $                 13 $                    88,900 $            11 $                              74,200 Fixed Cost $                    30,000 $                              30,000 Net Operating Profit $                    58,900 $                              44,200 Answer Variable cost per unit decrease by 10 percent Operating Profit increases by 9.07% $ 4900/ $ 54000 Variable cost per unit increases by 20 percent Operating Profit decreases by 18.15% $ 9800/ $ 54000

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