Citizen sells a watch for $35 at a variable cost of $15 per unit and fixed cost of $1 million per annum. Recent recession has seen jump in material cost by $7. What is the change in profit due to recession if Citizen produces and sells 100 000 watches in a year?
A) $1 000 000 decrease
B) $700 000 decrease
C) $300 000 decrease
D) $800 000 increase
E) $1 800 000 increase

Question

Quizplus · Accepted Answer

Total revenue = $35 x 100,000 = $3,500,000
Variable cost = $15 x 100,000 = $1,500,000
Total cost = $1,000,000 + $1,500,000 + $700,000 = $3,200,000
Profit = Total revenue - Total cost = $3,500,000 - $3,200,000 = $300,000

If material cost jumps by $7, then variable cost per unit becomes $15+$7=$22. 
New variable cost for 100,000 watches = $22 x 100,000 = $2,200,000
Total cost = $1,000,000 + $2,200,000= $3,200,000 + $700,000 (fixed cost) = $3,900,000
New profit = Total revenue - Total cost = $3,500,000 - $3,900,000 = -$400,000
Profit decreased by $400,000, thus the answer is (B) $700,000 decrease.

Citizen Sells a Watch for $35 at a Variable Cost