Question

You have been provided with the following information: If sales decrease by 500 units, how much will fixed expenses have to be reduced by to maintain the current operating profit of $6,000?

Answer 1

Answer:

$3,000

Explanation:

                                            Per Unit             Total

Sales                                     $15                    $45,000

Less variable expenses       $9                     -$27,000

Contribution margin            $6                      $18,000

Less fixed expenses                                     -$12,000

Operating profit                                             $6,000

first we must calculate total unit sales = $45,000 / $15 = 3,000 units

if 500 less units are sold, then the total contribution margin will be $15,000, and if you want to keep operating profit at $6,000, your fixed expenses must equal:

contribution margin - fixed expenses = operating profit

$15,000 - fixed expenses = $6,000

$15,000 - $6,000 = fixed expenses

$9,000 = fixed expenses

since the current fixed expenses are $12,000 and you need them to be $9,000, they must be reduced by $3,000