Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 55

Profit Planning and Sensitivity Analysis You are currently trying to decide between two cost structures for your business, one that has a greater proportion of short-term fixed costs, the other that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternative is as follows:

	Cost Structure
	Alternative #1	Alternative #2
Selling price per unit	$ 100	$ 100
Variable cost per unit	$ 85	$ 80
Short-term fixed costs/year	$ 40,000	$ 45,000

Required

1. What sales volume, in units, is needed for the total costs in each cost-structure alternative to be the same?

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2. Suppose your profit goal for the coming year is 5 percent on sales (i.e., operating profit/sales = 5%). What sales level in units is needed under each alternative to achieve this goal?

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3. Suppose again that your profit goal for the coming year is 5 percent on sales. What sales volume in dollars is needed under each alternative to achieve this goal?

Step 1 of 5

1.

The sales volume in units that are needed to be achieved for the two cost structures to be the same:

We denote the sales volume to be derived for both the alternatives to be S.

Calculation of the total cost for both the aternatives are shown below:

Therefore the sales volume needed would be when both the total cost of both the alternatives would be equal.

Hence the sales volume which is needed for the two cost alternatives to be the same is 1,000 units.