Question

Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year.

(1) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 35% to 135,000 units. What is the incremental impact of this price drop on the firms EBIT? (Hint: EBIT=Sales-COGS)

(2) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 35% to 135,000 units. Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 70%. Considering the increase in the sale of testing strips, what is the incremental impact of this price drop on the firms EBIT? (Hint: EBIT=Sales-COGS)   

Answer 1

Solution

	Ans a)
		Computation of original EBIT
		sales		12,900,000
		129*100000
	Less	Cost		5,000,000
		50*100000
	A	EBIT		7,900,000
		Revised EBIT
		sales		13365000
		99*135000
	Less	Cost		6750000
		50*135000
	B	EBIT		6,615,000
	C=B-A	Incremental impact =		(1,285,000)
		EBIT will decline by 1285000
	Ans b)
	A	Base EBIT=		7,900,000
		Testing strips incremental EBIT
		sales		3500000
		100*35000
		EBIT @70%		2450000
		EBIT =		2,450,000
	B	Revised total EBIT=		9,065,000
		4050000+6615000
	C=B-A	Incremental impact		1,165,000