A company's sales revenue decreased by 15% from one operating period to the next. Assuming no change in the prices of its inputs and outputs, by what percentage did:
Fixed costs change?
Unit variable costs change?
Total variable costs change?
To find out how fixed costs, unit variable costs, and total variable costs are affected when the sales revenue decreases by 15%, we need to understand the concept of cost behavior.
1. Fixed costs: Fixed costs are expenses that do not change with the level of production or sales. Examples include rent, salaries, and insurance. Since fixed costs are not dependent on sales revenue, they do not change when sales decrease. Therefore, the percentage change in fixed costs is 0%.
2. Unit variable costs: Unit variable costs are the expenses that change proportionally with the level of production or sales. Examples include the cost of raw materials and direct labor. To find the percentage change in unit variable costs, we need to identify the relationship between sales revenue and unit variable costs. We can calculate this by dividing the change in sales revenue by the original sales revenue.
Let's assume the original sales revenue is X. With a decrease of 15%, the new sales revenue would be (X - 0.15X) = 0.85X. Now, we can calculate the percentage change in unit variable costs by dividing the change in unit variable costs by the original unit variable costs.
3. Total variable costs: Total variable costs are the sum of unit variable costs multiplied by the quantity of units produced or sold. To calculate the percentage change in total variable costs, we need to multiply the percentage change in unit variable costs by the percentage change in the quantity of units produced or sold.
Unfortunately, the question does not provide information about the change in the quantity of units produced or sold. Without that information, we cannot determine the exact percentage change in total variable costs.
In summary:
- Fixed costs do not change (0% change) when sales revenue decreases.
- To calculate the percentage change in unit variable costs, we need information on the relationship between sales revenue and unit variable costs.
- Without information on the change in the quantity of units produced or sold, we cannot determine the precise percentage change in total variable costs.