Question

Hyperion​ Inc., currently sells its latest​ high-speed colour​ printer, the Hyper​ 500, for $ 364. Its cost of goods sold for the Hyper 500 is $ 208 per​ unit, and this​ year's sales​ (at the current price of $ 364​) are expected to be 23,000 units. Hyperion plans to lower the price of the Hyper 500 to $ 312 one year from now.

a. Suppose Hyperion considers dropping the price to $ 312 ​immediately, (rather than waiting one​ year). By doing so it expects to increase this​ year's sales by 26 % to 28,980 units. What would be the incremental impact on this​ year's EBIT of such a price​ drop?

The change in EBIT will be ​$____. ​(Round to the nearest​ dollar.)

b. Suppose that for each printer​ sold, Hyperion expects additional sales of $ 75 per year on ink cartridges for the​ three-year life of the​ printer, and Hyperion has a gross profit margin of 78 % on ink cartridges.

Change in EBIT from ink cartridge​ sales: $____

Incremental Change in EBIT for year 1: $____

Incremental Change in EBIT for year 2: $____

Incremental Change in EBIT for year 3: $____

Answer 1

EBIT = UNIT Sold * Contribution Each Unit

EBIT Using without price drop:

Sales Price = 364

COGS = 208

UNITS Sold = 23,000

EBIT =  23,000 * ( 364 - 208) = 3588,000

EBIT Using price drop:

Sales Price =  312

COGS = 208

UNITS Sold = 28,980

EBIT =  23,000 * ( 364 - 208)  = 3013,920

incremental impact on this​ year's EBIT   = 3013,920 - 3588,000 = - 574,080 (Ans)

Ink cartridge​ sales :

incremental impact due to  Ink cartridge​ sales = ( Change in Units) * Price * Contribution Margin

Change in Units =   28,980 - 23,000 = 5980

Year incremental impact due to Ink cartridge​ sales = 5980 * 75 * 78% = 349,830

Ans : Change in EBIT from ink cartridge​ sales: = 349,830 (Ans)

So,

Incremental Change in EBIT for year 1:  

Incremental impact on this​ year's EBIT + Year 01 Ink incremental impact due to Ink cartridge​ sales

=  - 574,080 + 349,830 = -224,250 (Ans)

Incremental Change in EBIT for year 2:

= incremental impact due to Ink cartridge​ sales = 349,830 (Ans)

Incremental Change in EBIT for year 3:

= incremental impact due to Ink cartridge​ sales = 349,830 (Ans)