Refer to Alexandre’s Steel Parts in E7-44B. Alexandre feels like he is in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Alexandre’s contribution margin has shrunk to 60% of revenues. Alexandre’s monthly operating income, prior to these pressures, was $307,000.
1. To maintain this same level of profit, what sales volume (in sales revenue) must Alexandre now achieve?
2. Alexandre believes that his monthly sales revenue will only go as high as $1,030,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,030,000, by how much will he need to cut fixed costs to maintain his prior profit level of $307,000 per month?