Question

Hyperion​ Inc., currently sells its latest​ high-speed colour​ printer, the Hyper​ 500, for $ 362. Its cost of goods sold for the Hyper 500 is $ 207 per​ unit, and this​ year's sales​ (at the current price of $ 362​) are expected to be 17000 units. Hyperion plans to lower the price of the Hyper 500 to $ 310 one year from now. a. Suppose Hyperion considers dropping the price to $ 310 ​immediately, (rather than waiting one​ year). By doing so it expects to increase this​ year's sales by 24 % to 21 comma 080 units. What would be the incremental impact on this​ year's EBIT of such a price​ drop? b. Suppose that for each printer​ sold, Hyperion expects additional sales of $ 76 per year on ink cartridges for the​ three-year life of the​ printer, and Hyperion has a gross profit margin of 76 % on ink cartridges. What is the incremental impact on EBIT for the next three years of dropping the price immediately​ (rather than waiting one​ year)?

Answer 1

Answer :

a) The incremental impact on EBIT can be calculated as the difference between the EBIT after decrease in price and EBIT before the decrease. The EBIT under each case would be calculated as:

EBIT = Units * ( Selling price - Cost of goods sold )

From the information given in the question, we get,

Gross profit after decrease in price = 21,080 * ( 310 - 207 ) = $2,171,240

Gross profit after decrease in price = 17,000 * ( 362 - 207 ) = $2,635,000

Therefore,

Incremental impact on EBIT = $2,171,240 - $2,635,000 = - $463,760

b) To calculate the incremental impact on EBIT for the next three years, we need to determine the incremental impact on EBIT from ink cartridge sales.

EBIT from ink cartridge sales ( after price decrease ) = 21,080 * 76 * 76% = $1,217,580.80

EBIT from ink cartridge sales ( before price decrease ) = 17,000 * 76 * 76% = $981,920

Change in EBIT from ink cartridge sales = $1,217,580.80 - $981,920 = $235,660.80 (or) $235,661

Therefore,

Incremental impact on EBIT ( year 1 ) = Change in EBIT from ink cartridge sales + Incremental impact on EBIT from price decrease

= $235,661 - $463,760 = - $228,099

Incremental impact on EBIT ( year 2 ) = Change in EBIT from ink cartridge sales = $235,661

Incremental impact on EBIT ( year 3 ) = Change in EBIT from ink cartridge sales = $235,661