Question

Given the following data: Per Unit Total Sales $ 18 $ 54,000 Less variable expenses 10...

Given the following data:

Per Unit Total
Sales $ 18 $ 54,000
Less variable expenses 10 30,000
Contribution margin 8 24,000
Less fixed expenses 16,000
Net income $ 8,000


If sales decrease by 500 units, by what percent would fixed costs have to be reduced to maintain current net income?

50.0%

33.3%

25.0%

16.7%

Business   Accounting   
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Answer #1
2500 units level
Sales 45000 ( 2500 units X $18 per unit
Less Variable cost 25000 2500 units X $10 per unit
Contribution 20000 45000-25000
Less Fixed cost 12000 20000-8000
Profit 8000
to calculate the change in fixed cost = Change in Fixed cost /previous level fixed cost 25% (16000 - 12000)/16000 X 100
contribution is $20000 of which desired profit is $80000,fixed cost after reducing the Desired profit is $12000 (20000-8000)
to get change in fixed cost as percentage existing level of fixed cost less current level of fixed cost and divided by existing level of fixed cost (16000-12000)/16000 then we will arrive 25%
Calculation of current level of production
Sales value $54,000
Selling price per unit $18 per unit
Number of units sold is 3000 54000 / $18 per unit
total value is $54000, the selling price per unit is $18 per unit, the sales value divided by selling price per unit we will arrive the number of units sold that is 3000 units
current level of production is 3000 units less 500 units we will arrive the 2500 units
Note : in general situation the fixed cost remains constant in value but the per unit will change increase or decrease volume of production
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