Question

Plasiderm, Inc., sells a medical product. The company is currently selling the product for $18/unit and is considering whether it could increase profits by increasing the product’s price to $20/unit. Plasiderm currently sells 50,000 units per week. Its current weekly operating data are as follows: Sales revenue $900,000 Variable costs $400,000 Fixed costs $250,000 Pretax profit $250,000 You can assume that per-unit variable costs do not vary with the level of production.

(a) What is the breakeven sales level for the price increase that Plasiderm is considering? Explain what this breakeven sales level means.

(b) If the sales level for this product decreased by 5,000 units per week after the price increase, what would be the change in Plasiderm’s weekly pretax profits caused by the price increase?

(c) What would be Plasiderm’s profit change if, after the price increase, sales remained at 50,000 units per week?

Answer 1

Fixed cost = $250,000

Variable cost for 50,000 units = $400,000 i.e. $8/unit

Sale price = $18/unit

New Sale price = $20/unit

a. Break even sales level for price increase:

Breakeven sales level means: The breakeven sales level is the level of sales/ production at which the costs of production equal the revenues for a product. The breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.

Breakeven point = Fixed cost / (sale price – Variable cost)

Breakeven point = 250000 / (20- 8) = 20833.33 unit

Therefore, Plasiderm will achieve breakeven sales level for increased price by selling 20,833.33 units.

Breakeven sales level = 20833.33*20 = 416,666.67

b. If the sales level for this product decreased by 5,000 units per week after the price increase, Plasiderm’s weekly pretax profits:

Unit Sold at increased sale price = 50000- 5000 = 45,000

Sales revenue @ 20/unit = 45000*20 = $900,000

Variable cost @8/unit = 45000*8 = $360,000

Fixed Cost = $250,000

Pretax profit caused by the price increase =Sales revenue – Fixed cost – Variable cost

Pretax profit caused by the price increase = 900000 – 250000 – 360000

Pretax profit caused by the price increase =290,000

c. Plasiderm’s profit change if, after the price increase, sales remained at 50,000 units per week:

Unit Sold = 50000

Sales revenue @ 20/unit = 50000*20 = $1,000,000

Variable cost @8/unit = 50000*8 = $400,000

Fixed Cost = $250,000

Pretax profit caused by the price increase = 1000000 – 400000 – 250000 = $350,000

Pretax profit at current price = $250,000

Plasiderm’s profit change = (350000- 250000)/ 250000

Plasiderm’s profit change = 40%