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RR_CPA
Major Contributor

Joined: 02 Mar 2009
Location: Canada
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Posts: 338

Posted: 22 Jun 2010 at 14:27 \| IP Logged

A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a

sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is

considering an increase in production to 12,000 units. Which of the following statements is correct

regarding the company's next steps?

a. If production is increased to 12,000 units, profits will increase by $50,000.

b. If production is increased to 12,000 units, profits will increase by $100,000.

c. If production remains at 10,000 units, profits will decrease by $50,000.

d. If production remains at 10,000 units, profits will decrease by $100,000.

Answer is D: Can you please explain how it is D, I thought it is C.

BRAF=CPA
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Joined: 03 Jun 2010
Online Status: Offline
Posts: 54

Posted: 22 Jun 2010 at 14:52 \| IP Logged

The problem originally has a $50,000 profit. $850,000 in sales, less ($500,000 in VC's and $300,000 FC).

If the VC increases 20% per unit, then it would cost the company $60/unit VC. If production is still at 10,000, then the calculation would be Sales of $850,000 less ($600,000 VC (60 x 10,000 units) + $300,000 FC) = ($50,000) in losses.

This would be a $100,000 decrease (or swing) in profits.

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RR_CPA
Major Contributor

Joined: 02 Mar 2009
Location: Canada
Online Status: Offline
Posts: 338

Posted: 22 Jun 2010 at 15:18 \| IP Logged

Thanks alot, got it... I was missing one point.

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