Chapter 7, Problem 7.47BE

Continuation of E7-46B: Changing business conditions (Learning Objective 3)

Refer to Oleg’s Steel Parts in E7-46B. Oleg feels like he’s in a giant squeeze play: The automotive manufacturers are demanding lower prices, and the steel producers have increased raw material costs. Oleg’s contribution margin has shrunk to 45% of revenues. Oleg’s monthly operating income, prior to these pressures, was $37,500.

Requirements

1. 1. To maintain this same level of profit, what sales volume (in sales revenue) must Oleg now achieve?
2. 2. Oleg believes that his monthly sales revenue will only go as high as $1,050,000. He is thinking about moving operations overseas to cut fixed costs. If monthly sales are $1,050,000, by how much will he need to cut fixed costs to maintain his prior profit level of $37,500 per month?