Roxbury Manufacturing Company is a privately owned business. Products manufactured
by Roxbury had been doing very well until the year 2011. The last two years have seen a
steady decline in sales and profit. If this declining trend continues, the company might
come under financial distress. Income statements for the last two years are given below.
Year 1

Percent

Year 2

Percent
Sales
Less Variable Expenses
Total Contribution Margin
Less Fixed Expenses
Net Income before taxes

$ 5,000,000 100
$ 4,500,000 100
$ 3,750,000
75
$ 3,375,000
75
——————————————————————-$ 1,250,000
25
$ 1,125,000
25
$ 1,000,000
$ 1,000,000
——————————————————————”$ 250,000
$ 125,000
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Mr. Creighton, the owner of the company is baffled that only a ten percent decline in
sales has resulted in a twenty percent decline in profits. He asks you to explain to him
how in spite of maintaining efficiency in operations by keeping variable expenses and
contribution margin at the same percentage level, he has experienced a greater
percentage decline in profits.