A company has provided the following data:
$\begin{array}{llr}
\text { Sales } & 3,000 \text { Units } \
\text { Sales price } & \$ 7 \text { per unit } \
\text { Variable cost } & \$ 50 \text { per unit } \
\text { Fixed cost } & \$ 25,000
\end{array}$
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, operating profit will:
A) decrease by $31,875.
B) decrease by $15,000.
C) increase by $20,625.
D) decrease by $3,125.

Question

A company has provided the following data:
$\begin{array}{llr}
\text { Sales } &  3,000 \text { Units } \
\text { Sales price } & \$ 7 \text { per unit } \
\text { Variable cost } & \$  50 \text { per unit } \
\text { Fixed cost } & \$ 25,000
\end{array}$
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, operating profit will:
A) decrease by $31,875.
B) decrease by $15,000.
C) increase by $20,625.
D) decrease by $3,125.

Quizplus · Accepted Answer

The original sales revenue is $21,000 (3,000 units x $7). The original variable cost is $150,000 (3,000 units x $50), and the fixed cost is $25,000. The original operating profit is -$154,000. With a 25% decrease in sales volume, sales become 2,250 units. The new variable cost per unit is $57.50 ($50 + 15% of $50). The new sales revenue is $15,750 (2,250 units x $7), and the new variable cost is $129,375 (2,250 units x $57.50). The new operating profit is -$185,875. The decrease in operating profit is $31,875 ($185,875 - $154,000).

A Company Has Provided the Following Data If the Sales Volume Decreases by 25%, the Variable Cost