William’s Steel Parts produces parts for the automobile industry. The company has monthly fixed…
William’s Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $620,000 and a contribution margin of 80% of revenues.
William 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. William’s contribution margin has shrunk to 50% of revenues. William’s monthly operating income, prior to these pressures, was $196,000.
Requirements
1. To maintain this same level of profit, what sales volume (in sales revenue) must William now achieve?
2. William believes that his monthly sales revenue will only go as high as $1,020,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,020,000, by how much will he need to cut fixed costs to maintain his prior profit level of $196,000 per month?
