Question
In: Accounting
n 2017, McGrath & Sons, a small environmental-testing firm, performed 10 comma 800 radon tests for...
n 2017, McGrath & Sons, a small environmental-testing firm, performed 10 comma 800 radon tests for $ 280 each and 15 comma 600 lead tests for $ 180 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 13% next year. However, awareness of radon-related health hazards is expected to result in a 4% increase in radon-test volume each year in the near future. Jim McGrath feels that if he lowers his price for lead testing to $ 170 per test, he will have to face only a 7% decline in lead-test sales in 2018.
1. Prepare a 2018 sales budget for Sons assuming that McGrath holds prices at 2017 levels.
2. Prepare a 2018 sales budget for McGrath assuming McGrath lowers the price of a lead test to $170. Should McGrath lower the price of a lead test in 2018 if the company's goal is to maximize sales revenue?
Solutions
Expert Solution
1. Assuming that McGrath holds prices at 2017 levels
| McGrath & Sons | 2017 volume | At 2017 selling Prices |
Expected 2018 Change in volume |
Expected 2018 volume | |
| Radon Tests | 10800 | 280 | 4% | 11232 | |
| Lead tests | 15600 | 180 | -13% | 13572 | |
| McGrath and Sons | |||||
| Sales Budget | |||||
| Selling price | Units sold | Total revenues | |||
| Radon tests | 11232 | 280 | $ 3,144,960 | ||
| Lead tests | 13572 | 180 | $ 2,442,960 | ||
| $ 5,587,920 |
2. assuming McGrath lowers the price of a lead test to $170.
| McGrath & Sons | 2017 volume | At 2017 selling Prices |
Expected 2018 Change in volume |
Expected 2018 volume |
| Radon Tests | 10800 | 280 | 4% | 11232 |
| Lead tests | 15600 | 170 | -7% | 14508 |
| McGrath and Sons | ||||
| Sales Budget | ||||
| Selling price | Units sold | Total revenues | ||
| Radon tests | 11232 | 280 | $ 3,144,960 | |
| Lead tests | 14508 | 170 | $ 2,466,360 | |
| $ 5,611,320 | ||||
Expected revenues at the new 2018 prices are $5,611,320, which is higher than the expected 2018 revenues of $5,587,920 if the prices are unchanged. So, if the goal is to maximize sales revenue and if McGrath's forecasts are reliable, the company should lower its price for a lead test in 2018.
kindly upvote
ekkarill92 answered 2 years agoRelated Solutions
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