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Exercise 3-31 and 3-32 (Algo) (LO 3-1)

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Warner Clothing is considering the introduction of a new baseball cap for sales by local vendors. The company has collected the following price and cost characteristics.

Sales price	$	19	per unit
Variable costs		3	per unit
Fixed costs		54,000	per month

Exercise 3-32 (Algo) Basic Decision Analysis Using CVP (LO 3-1)

Assume that the company plans to sell 8,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

Required:

a. What will be the operating profit?

b. What is the impact on operating profit if the sales price decreases by 5 percent? Increases by 10 percent?

c. What is the impact on operating profit if variable costs per unit decrease by 5 percent? Increase by 10 percent?

d. Suppose that fixed costs for the year are 5 percent lower than projected, and variable costs per unit are 5 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?