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:

Sales price $ 20 per unit

Variable costs 5 per unit

Fixed costs 23,000 per year

Assume that the projected number of units sold for the year is 6,000. Consider requirements (b), (c), and (d) independently of each other.

(a) What will the operating profit be?

(b) What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?

(c) What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

(d) Suppose that fixed costs for the year are 10 percent lower than projected, and variable costs per unit are 10 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?

Explanation / Answer

A./

B./

IF SALES PRICE DECEREASE BY 10%

OPERATING PROFIT WILL DECEREASE BY $12000

IF SALES PRICE INCEREASE BY 20%

OPERATING PROFIT WILL INCEREASE BY $24000

C./

IF VARIABLE COST PER UNIT DECEREASE BY 10%

OPERATING PROFIT WILL INCEREASE BY $3000

IF VARIABLE COST PER UNIT INCEREASE BY 20%

OPERATING PROFIT WILL DECEREASE BY $6000

D./

OPERATING PROFIT WILL GO DOWN BY $700.

DETAILS AMOUNT SALES REVENUE (6000 * $20) $120000 LESS VARIABLE COST(6000 * $5) ($30000) LESS FIXED COST ($23000) OPERATING PROFIT $67000

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