A company is debating whether to change its cost structure so that fixed costs increase from $300,000 to $400,000,but variable costs decrease from $5 per unit to $4 per unit.If it were to implement the change at its current production level of 100,000 units,profit would not change.What would happen to the company's profit if the change were implemented and production increased to 125,000 units?
A)It will stay the same.
B)It will increase.
C)It will decrease.
D)It could increase or decrease.

Question

Quizplus · Accepted Answer

If the company were to implement the change at its current production level, profit would not change. This implies that the current profit is equal to the total revenue minus the total costs, which is (100,000 units * $5 per unit) - $300,000 = $200,000.

With the proposed cost structure change, the total fixed costs would increase to $400,000, and the variable costs would decrease to $4 per unit. So, the total costs would be (125,000 units * $4 per unit) + $400,000 = $1,000,000.

At 125,000 units, the total revenue would be 125,000 units * $5 per unit = $625,000.

Therefore, the profit would be $625,000 - $1,000,000 = -$375,000.

This means that the company would experience a loss if it were to implement the cost structure change and increase production to 125,000 units. Thus, choice B is the best answer.

A Company Is Debating Whether to Change Its Cost Structure