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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 ago
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