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.
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?