Learning Outcome
- Prepare a statement that shows a change in variable costs and sales volume
Ok, so we know what our choices are if our landlord raises the rent. But what if our supplier raises the cost of one of the components in our widget by $1 each? Unfortunately, this has happened and now you need to deal with it! This part is the most costly in the entire widget and isn’t made by many suppliers. Of course you know to call around and get pricing from everyone on this part, but what if you can’t get a lower price? How is this price increase in variable costs going to affect the profitability of the company?
| Cost-Volume-Profit (Pre-Price Increase) | |||||
|---|---|---|---|---|---|
| Monte Corporation | |||||
| Number Sold | 1 | 50 | 100 | 150 | 200 |
| Price per Item | $10 | $500 | $1,000 | $1,500 | $2,000 |
| Variable cost per item | $4 | $200 | $400 | $600 | $800 |
| Contribution Margin | $6 | $300 | $600 | $900 | $1,200 |
| Fixed Costs | $400 | $400 | $400 | $400 | $400 |
| Profit (loss) | ($394) | ($100) | $200 | $500 | $800 |
We needed to sell 100 widgets to show a nice profit!
| Cost-Volume-Profit (Post-Price Increase) | |||||
|---|---|---|---|---|---|
| Monte Corporation | |||||
| Number Sold | 1 | 50 | 100 | 150 | 200 |
| Price per Item | $10 | $500 | $1,000 | $1,500 | $2,000 |
| Variable cost per item | $5 | $250 | $500 | $750 | $1,000 |
| Contribution Margin | $5 | $250 | $500 | $750 | $1,000 |
| Fixed Costs | $400 | $400 | $400 | $400 | $400 |
| Profit (loss) | ($395) | ($150) | $100 | $350 | $600 |
Look! A $1 per widget change in variable costs lowers your profit on the sale of 100 widgets by $100! That is a huge change in profit for a seemingly small change in cost. The company is still showing some profit, but something will probably need to change. What can you do?
If you are the buyer for Monte Corporation and your vendor increased this price, you have a few options again.
- Raise the price of your widgets to compensate for the additional cost per item (probably not the first course of action!).
- Search for a new vendor for the component (remember, there aren’t many suppliers who make this particular component).
- Try to negotiate with the vendor for a lower price (if this is a popular part, this may not be possible, but it is worth a try!).
Can you think of any other ways to deal with variable cost increases?
Practice Questions
