Question

In 2017, McGrath & Sons, a small​ environmental-testing firm, performed 11,000 radon tests for $ 300 each and 15,600 lead tests for $ 220 each. Because newer homes are being built with​ lead-free pipes, ​ lead-testing volume is expected to decrease by 99​% next year.​ However, awareness of​ radon-related health hazards is expected to result in a 55​% increase in​ radon-test volume each year in the near future. Jim McGrath feels that if he lowers his price for lead testing to $200 per​ test, he will have to face only a 44​% decline in lead-test sales in 2018.

Prepare a 2018 sales budget for McGrath & Sons assuming that McGrath holds prices at 2017 levels.

Prepare a 2018 sales budget for McGrath & Sons assuming that McGrath lowers the price of a lead test to $200. Should McGrath lower the price of a lead test in 2018 if the​company's goal is to maximize sales​revenue?

Answer 1

With no changes in price
Type of tests	Volume for 2017	Price in 2017	% change in volume	Volume for 2018	Price in 2018
Radon tests	11,000	$300	55%	17050	$300
Lead tests	15,600	$220	-99%	156	$220
Sales budget is shown below
Sales budget for the year ended 2018
	Selling price	Units sold	Total revenue
Radon tests	$300	17050	$5,115,000
Lead tests	$220	156	$34,320
			$5,149,320
With change in price
Type of tests	Volume for 2017	Price in 2017	% change in volume	Volume for 2018	Price in 2018
Radon tests	11,000	$300	55%	17050	$300
Lead tests	15,600	$220	-44%	8736	$200
Sales budget is shown below
Sales budget for the year ended 2018
	Selling price	Units sold	Total revenue
Radon tests	$300	17050	$5,115,000
Lead tests	$200	8736	$1,747,200
			$6,862,200
McGrath should lower the sales volume as it would increase its revenue by $1,712,880 (6,862,200-5,149,320)