Exercise 3-29 Basic Decision Analysis Using CVP (LO 3-1)

Derby Phones is considering the introduction of a new model of headphones with the following price and cost characteristics:

Sales price	$	270	per unit
Variable costs		120	per unit
Fixed costs		300,000	per month

Assume that the projected number of units sold for the month is 5,000. Consider requirements (b), (c), and (d) independently of each other.

Required:

a. What will the operating profit be?

b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?

c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

d. Suppose that fixed costs for the year are 20 percent lower than projected, and variable costs per unit are 10 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?