Application of Cost-Volume-Profit Relationships:

Quality stores open for 10 hours a day. Company is considering decreasing the store hours through one hour. This shall result in a loss of 400 liters of sales per month and would cut fixed costs by Rs. 10,000 per month. Should the company change its store hours?

Analysis

Decrease in revenue = 400 × 50 = Rs. 20,000 per month

Reduction in fixed cost = Rs. 10,000 per month

Loss of contribution margin = 20,000 × 0.255 = Rs. 5100 per month

Increase in net monthly income per store = 10,000 - 5,100 = Rs. 4900

Above performed analysis mention that by following the aforementioned policy of decreasing the store hours by one hour each day shall result in a profit of Rs. 4900. Therefore the policy is beneficial to the company.