You are currently trying to decide between two cost structures for your business: one that...
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Accounting
You are currently trying to decide between two cost structures for your business: one that has a greater proportion of short-term fixed costs and another that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternative are as follows:
Cost Structure
Alternative #1
Alternative #2
Selling price per unit
$
100
$
100
Variable cost per unit
85
80
Short-term fixed costs/year
10,000
15,000
Required:
1.
What sales volume, in units, is needed for the total costs in each cost-structure alternative to be the same?
2.
Suppose your profit goal for the coming year is 5% of sales (i.e., operating profit sales = 5%). What sales level in units is needed under each alternative to achieve this goal?
3.
Suppose again that your profit goal for the coming year is 5% of sales. What sales volume in dollars is needed under each alternative to achieve this goal?
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