Question

Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. Its cost of goods sold for the Hyper 500 is $150 per unit, and this year’s sales are 10,000 units. Hyperion plans to lower the price to $300 per unit next year and, the company expects this can increase the sales of next year to 15,000 units. If Hyperion were to keep the price at $350, then the company expects the sales would still be 10,000 units for next year. (In both cases, the cost per unit sold would remain at $150 next year.) The annual depreciation expense is $150,000 and the marginal tax rate is 35%. What is the incremental EBIT of such a price drop for next year?

Answer 1

Answer:

Current Plan:

Number of units sold = 10,000
Selling Price = $350 per unit
Cost of Goods Sold = $150 per unit
Depreciation Expense = $150,000

Sales Revenue = $350 * 10,000
Sales Revenue = $3,500,000

Cost of Goods Sold = $150 * 10,000
Cost of Goods Sold = $1,500,000

EBIT = Sales Revenue - Cost of Goods Sold - Depreciation
EBIT = $3,500,000 - $1,500,000 - $150,000
EBIT = $1,850,000

Proposed Plan:

Number of units sold = 15,000
Selling Price = $300 per unit
Cost of Goods Sold = $150 per unit
Depreciation Expense = $150,000

Sales Revenue = $300 * 15,000
Sales Revenue = $4,500,000

Cost of Goods Sold = $150 * 15,000
Cost of Goods Sold = $2,250,000

EBIT = Sales Revenue - Cost of Goods Sold - Depreciation
EBIT = $4,500,000 - $2,250,000 - $150,000
EBIT = $2,100,000

Incremental EBIT = $2,100,000 - $1,850,000
Incremental EBIT = $250,000