Question
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
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 | 90 | 85 | |||||
Short-term fixed costs per year | 40,000 | 45,000 | |||||
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?
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