Question

QuestionPricing decisions Total fixed costs are $25,000. Unit variable cost is $20. At current selling price of $50, you sell 1,000 units per month. If you reduce the price by 10%, sale volume will increase to 1,300 units. Compute profit at the original price: Compute profit at the reduced price: Should you reduce the price? NO, because a lower price always reduces profit O YES, because revenue will increase by $8,500 YES, because profit will increase by $2,500

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Answer 1

Requirement 1

Profit at original price

Requirement 2

Profit at Reduced price

Requirement 3

Yes because profits will increase by $2500

Working

Comparative income statement
	1000 units	1300 units
Sales revenue	$   50,000.00*	$     58,500.00**
Variable costs	$   20,000.00	$     26,000.00
Contribution margin	$   30,000.00	$     32,500.00
Fixed cost	$   25,000.00	$     25,000.00
Net operating income	$     5,000.00	$        7,500.00

*1000 units x 50

**1300 units x 45