E7-24A Continuation of E7-23A: Changing business conditions (Learning Objective
ID: 2563699 • Letter: E
Question
E7-24A Continuation of E7-23A: Changing business conditions (Learning Objective 3) Refer to Grover's Steel Parts in E7-23A. Grover feels like he's in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have in- creased raw material costs. Grover's contribution margin has shrunk to 40% of revenues. The company's monthly operating income, prior to these pressures, was $77,000. Requirements 1. To maintain this same level of profit, what sales volume (in sales revenue) must Grover now achieve? 2. Grover believes that his monthly sales revenue will go only as high as $1,010,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,010,000, by how much will he need to cut fixed costs to maintain his prior profit level of $77,000 per month?Explanation / Answer
Req 1: Fixed cost = $ 630,000
Desired net operating income = $ 77,000
Revised CM ratio = 40%
Desired contribution = Total fixed cost + desired net operating income = 630,000+77000 = $ 707,000
Required sales in $ to earn desired profits = Desired contribution / Revised Cm ratio *100 =707,000 /40 *100=
= $ 1767,500
Req 2: Now monthly sale is fixed to $ 1010,000
Revised CM ratio = 40%
Total contribution that can be earned= 1010,000 *40% = $ 404,000
Less: Desired profits that has to be earned = $ 77,000
Therfore, Fixed cost that has to be $ 327,000
Fixed cost that need to be cut = 630,000 -327,000 = $ 303,000
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