Chapter 10 #6

You are currently trying to decide between two cost structures for your business: one that has a greater proportion of short-term fixed costs and another that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternative are as follows:

Cost Structure

Alternative 1 Alternative 2

Selling price per unit $ 100 $ 100

Variable cost per unit 70 65

Short-term fixed costs per year 55,000 60,000

Required: 1. What sales volume, in units, is needed for the total costs in each cost-structure alternative to be the same?

2. Suppose your profit goal for the coming year is 5% of sales (i.e., operating profit/sales = 5%). What sales level in units is needed under each alternative to achieve this goal?

3. Suppose again that your profit goal for the coming year is 5% of sales. What sales volume in dollars is needed under each alternative to achieve this goal?