Total Fitness and Aerobic Town reported the following results for 2014: $$\begin{array} { l c r }
& \text { Total Fitness } & \text { Aerobic Town } \
\text { Sales } & \$ 5,000,000 & \$ 5,000,000 \
\text { Variable costs } & 2,200,000 & 1,000,000 \
\text { Fixed costs } & 1,000,000 & 2,200,000
\end{array}$$ Due to an economic downturn, it is estimated that sales for both companies will decrease next year by $300,000. Which company will have the larger percentage decrease in profit next year?

Question

Total Fitness and Aerobic Town reported the following results for 2014: $$\begin{array} { l c r } 
& \text { Total Fitness } & \text { Aerobic Town } \
\text { Sales } & \$ 5,000,000 & \$ 5,000,000 \
\text { Variable costs } & 2,200,000 & 1,000,000 \
\text { Fixed costs } & 1,000,000 & 2,200,000
\end{array}$$ Due to an economic downturn, it is estimated that sales for both companies will decrease next year by $300,000. Which company will have the larger percentage decrease in profit next year?

Quizplus · Accepted Answer

Aerobic Town has higher fixed costs than Total Fitness. When sales decrease, the fixed costs will have a greater impact on Aerobic Town's profit than on Total Fitness's profit.

Total Fitness and Aerobic Town Reported the Following Results for 2014