Question

THIS IS FOR PRICING NOT FINANCE

Westside produces pillows with monthly unit sales and costs given as:

 Unit Sales: 4000 units  Price: $10.00 per unit  Variable costs: $5.50 per unit  Fixed costs: $15,000

1.Replacing goose feathers with synthetic filler will decrease the unit variable cost by $0.22. By what % would sales have to increase to assure the 5% price cut?

Answer 1

here first we have to calculate net profit at current level:

Net profit = sales*(price - variable costs) - fixed costs

(Price - variable cost = contribution)

= 4000*(10 - 5.50) - 15000

= 18,000 - 15,000

= $3,000

1)

New variable cost = 5.50 - 0.22 = 5.28

given, selling price decrease by 5%

new selling price = 10*(1 - 5%) = 9.5

Contribution = 9.5 - 5.28 = 4.22

required number of sales = (fixed cost + desired profit) / contribution

= (15000 + 3000) / 4.22

= 4265.40 units (lets round to 4266 because we cannot sell portion of unit)

Total sales revenue = 4266*9.5 = 40527

old sales = 4000*10 = 4000

% increase in sales(in dollars) = (new sales - old sales) / old sales

= (40527 - 40000) / 40000

= 1.32%

% increase in sales (in units) = (new sale units - old sale units ) / old sales in units

= (4266 - 4000) / 4000

= 6.6%

(it is not clearly given in question that required % change is in dollars or units so i have caluclated both)