Question

In: Accounting

A manufacturer produces a product that sells for $10 per unit. Variable costs per unit are...

A manufacturer produces a product that sells for $10 per unit. Variable costs per unit are $6 and total fixed costs are $12,000. At this selling price, the company earns a profit equal to 10% of total dollar sales. By reducing its selling price to $9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price were reduced to $9 per unit, the profit would be
A. $3,000
B. $4,000
C. $5,000
D. $6,000

Expert Solution

Contribution at $10 selling pice

	Sales 10 selling price

Sale	10
Less: variable cost	6
Contribution per unit	4

Let units sold at $10 be y

We know sales per unit - variable cost per unit = contribution per unit

Contribution per unit x Units sold = total contribution

Total contribution - total fixed cost = Total profit

Total profit can also be written as profit per unit x units sold

Profit per unit = 10% of $10 x Y(Total sales values) =$1y

Total contribution = $4 x y

Fixed cost 12000

Profit=

4y - 12000= 1y

3y=12000

y=4000

Units sold = 4000 units

To verify same

Contribution per unit = 4

Total contribution = 4 x 4000units = 16000

Profit = 16000-12000 = 4000

10% of sales = 10% x (4000x10) =4000 hence its correct

Now new sales units will increase by 25 %

new sales units 4000(1+0.25)= 5000 units

Profit

New sales price is $9	9 x 5000=45000
Less: Variable cost	6 x 5000 =30000
Contribution	15000
Les s: Fixed cost	12000
Profit	3000

So correct option is A

ekkarill92 answered 2 years ago

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