Taizhong Semiconductor Company mass produces several common computer chips. Type A sells for $1.20 per unit. Variable cost is $0.95 per unit and the fixed costs are $32 000 per month. Taizhong currently sells 140 000 units per month. Under intense pressure to boost profits, the production manager has a plan which will reduce fixed costs by 10%. How will this affect net profit?

Question

Quizplus · Accepted Answer

Reducing fixed costs by 10% saves $3,200. The current profit is $35,000. The increase in profit ($3,200) is approximately 9.14% of the current profit, but since the fixed cost reduction directly impacts net profit, the percentage increase in net profit is much higher, approximately 107%.

Taizhong Semiconductor Company Mass Produces Several Common Computer Chips