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Varsity's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $460,000 and a contribution margin of 75% of revenues.
Varsity's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $460,000 and a contribution margin of 75% of revenues. Varsity feels like he is in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Varsity's contribution margin has shrunk to 50% of revenues. Varsity's monthly operating income, prior to these pressures, was $310,000.
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1. | To maintain this same level of profit, what sales volume (in sales revenue) must Varsity now achieve? |
2. | Varsity believes that his monthly sales revenue will go only as high as$1,160,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are$1,160,000, by how much will he need to cut fixed costs to maintain his prior profit level of$310,000 per month? |
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