Rally Synthesis Inc. manufactures and sells 100 bottles per day. Fixed costs are $22,000 and the variable costs for manufacturing 100 bottles are $30,000. Each bottle is sold for $1,200. How would the daily profit be affected if the daily volume of sales drop by 10%?
A) profits are reduced by $9,000
B) profits are reduced by $3,000
C) profits are reduced by $12,000
D) profits are reduced by $59,000

Question

Quizplus · Accepted Answer

Variable cost per unit = $30,000 / 100 = $300
Profit for 100 bottles = ($1,200 × 100) - ($22,000 + $30,000 ) = 68,000
Sales after 10% drop = 100 × (1 - 0.1) = 90
Profit for 90 bottles = ($1,200 × 90) - ($22,000 + (90 × 300))= $59,000
Change in profit = $68,000 - $59,000 = $9,000. Hence, the profit has decreased by $9,000.