CASE 2

Roxbury Manufacturing Company is a privately owned business. Products manufactured by Roxbury had been doing very well until the year 2011. Last two years have seen a steady decline in sales and profit. If this declining trend continues, the company might come under financial distress. Income statements for the last two years are given below.

Year 1 Percent Year 2 Percent

Sales $ 4,000,000 100 $ 3,600,000 100

Less Variable Expenses $ 3,000,000 75 $ 2,700,000 75

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Total Contribution Margin $ 1,000,000 25 $ 900,000 25

Less Fixed Expenses $ 500,000 $ 500,000

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Net Income before taxes $ 500,000 $ 400,000

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Mr. Creighton, the owner of the company is baffled that only a ten percent decline in sales has resulted in a twenty percent decline in profits. He asks you to explain to him how in spite of maintaining efficiency in operations by keeping variable expenses and contribution margin at the same percentage level, he has experienced a greater percentage decline in profits.