The incremental profit is $175,000 and the new situation would obviously have less business risk than the old one.
<h3>Incremental profit</h3>
First step
Profit $600,000
Add Fixed cost $3,000,000
Contribution $3,600,000
Variable Cost=Total Sales−Contribution
Variable Cost=$115,000×50-$3,600,000
Variable Cost=$2,150,000
Second step
Profit at revised cost
Sales $8,625,000
(75x $115,000)
Less: Variable cost $4,350,000
[75×($3,000,000+$500,000/50-$12,000)]
Contribution $4,275,000
Less Fixed cost $3,500,000
($3,000,000+$500,000)
Profit $775,000
Incremental profit=Profit at revised cost-Existing profit
Incremental profit=$775,000-$600,000
Incremental profit=$175,000
Expected rate of return=Incremental profit/Investment
Expected rate of return=$175,000/$4,000,000×100
Expected rate of return=$4.375%
2. Break-even point
Existing
Break-even point=Fixed cost/Contribution
Break-even point=$3,000,000/[($115,000-($3,000,000+$500,000/50)]
Break-even point=$3,000,000/[($115,000-$70,000)
Break-even point= 66.67
Revised
Break-even point=Fixed cost/Contribution
Break-even point=$3,500,000/[($110,000-($3,000,000/50)]
Break-even point=$3,000,000/[($110,000-$60,000)
Break-even point=60
II. The new situation would obviously have less business risk than the old one.
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