Question

Please answer form a to e (all questions)

The manager of Calypso, Inc. is considering raising its current price of $34 per unit by 10%. If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 50,100 units per month, each of which costs $21 in variable costs. Fixed costs are $200,000.

a. What is the current profit?

b. What is the current break-even point in units? (Round your answer to the nearest whole number.)

c. If the manager raises the price, what will profit be? (Do not round intermediate calculations.)

d. If the manager raises the price, what will be the new break-even point in units? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

e. Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Answer 1

a) Calculation of Current profit

Particulars	Per unit	Amount (in $)
Units sold		50,100
Sales value	34	1,703,400
Variable Cost	21	1,052,100
Fixed cost		200,000
Total Cost		1,252,100
Total Profit		451,300

b) Calculation of break even point in units

Contribution per unit = Selling price p.u - Variable cost p.u

= $ 34 - $21 ==> $13  

Fixed Cost = $ 200,000

Break even point ( in units) = Fixed cost/ Contribution per unit

= 200,000/ 13

= 15,385 units.

c) Calculation of revised profit in case of price increase

Particulars	Per unit	Amount (in $)
Units sold		30,100
Sales value	37.40	1,125,740
Variable Cost	21.00	632,100
Fixed cost		200,000
Total Cost		832,100
Total Profit		293,640

d) Calculation of new break even point (in units)

Contribution per unit = Selling price p.u - Variable cost p.u

= $ 37.40 - $21.00 ==> $16.40

Fixed Cost = $ 200,000

Break even point ( in units) = Fixed cost/ Contribution per unit

= 200,000/ 16.40

= 12,195 units.

e) New contribution per unit = $ 16.40

Current profit = $ 451,300

Fixed cost = $ 200,000

Units to be sold to maintain current profit = (Current profit + Fixed cost)/ Contribution per unit

= (451,300 + 200,000)/ 16.40

= 39,714 units

Manager would not bother if sales drop by 10,386 units (50,100 - 39,714) to implement the price revision.