Continuation of E7-21: changing business conditions (Learning Objective 3)

Refer to Dave’s Steel Parts in E7-21. Dave feels like he’s in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Dave’s contribution margin has shrunk to 60% of rev¬ enues. Dave’s monthly operating income, prior to these pressures, was $160,000.

Requirements 1. To maintain this same level of profit, what sales volume (in sales revenue) must Dave now achieve?

2. Dave believes that his monthly sales revenue will go only as high as $1,000,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,000,000, by how much will he need to cut fixed costs to maintain his prior profit level of $160,000 per month?