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How should you restructure you variable and fixed costs within your firm?

You are working on an analysis of your company's current cost structure reviewing the various fixed and variable costs within your firm. Your objective is to maximize your firm's profit. In reviewing your current sales you are confident that you will reach a sales level of 40,000 units. Your fixed costs are presently $400,000 with a variable cost per unit of $25 per unit and a sales price of $43. Your options are:

a. Increase your fixed costs by $50,000 which will decrease variable costs by $8 per unit.

b. Sell off $100,000 of your fixed costs which will increase your variable costs by $12 per unit.

c. Decrease your sales price by $5 in order to increase sales by 5,000 units.

Which of the above alternatives would your choose to increase profits?

Solution Preview

Hi, here is the solution...

400,000 + 25x = Total cost.

Sale price is $43.

Break even point = Fixed Costs divided by (Revenue per unit - Variable costs per unit)

= 400,000/(43-25) = 400,000/18 = 22222 (Rounded off the numbers)

They sold 40,000 units.

Sold amount = 40,000(43) = $1720000

Profit = Sold amount - Total cost

= 1720000 - ...

Solution Summary

You are working on an analysis of your company's current cost structure reviewing the various fixed and variable costs within your firm. Your objective is to maximize your firm's profit. In reviewing your current sales you are confident that you will reach a sales level of 40,000 units. Your fixed costs are presently $400,000 with a variable cost per unit of $25 per unit and a sales price of $43. Your options are:

$2.19