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.
Oleg’s Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $750,000 and a contribution margin of 75% of revenues.
1. To maintain this same level of profit, what sales volume (in sales revenue) must Oleg now achieve?
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?