The accountants at French Perfumery decided to increase the price of a scent called Breezy by...

The accountants at French Perfumery decided to increase the price of a scent called Breezy by 11 %, from $ 6.42 per bottle to $ 7.13 . French's accountants expect the 11 % price increase to reduce unit sales by 21 %. Current sales are 214,000 bottles, and total variable costs are $ 856,000 .

Required

Estimate the pretax profit effect of the price change, assuming no effect on the variable cost rate, on total fixed costs, or on sales of other products. (Hint: Calculate the contribution margin at the old and new prices and volumes.) (Round answers to 0 decimal places.)

Contribution margin (old)	$
Contribution margin (new)	$

Solutions

Expert Solution

CALCULATION OF CONTRIBUTION MARGIN:

To calculate contribution we need sale price per unit and variable cost per unit. We have sale price per unit given in question, now we calculate variable cost per unit ie.

Total variable cost / units produced

$856000/214000 = $4 per unit

Derease in sale because of increase in price is 21%

21% of 214000 = 44940 units

New units is to be sold = 169060 units

Now Contribution at old and new price is as follows:

PARTICULARS	CONTRIBUTION MARGIN (OLD) AT 214000 UNITS	CONTRIBUTION MARGIN (NEW) AT 169060 UNITS
Sales @ $6.42 Sales @ $ 7.13	$1373880 -	- $1205398
Less: Variable Cost @ $4 per unit	$856000	$676240

CONTRIBUTION	517880	529158

ekkarill92 answered 1 year ago

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