Question

Question 1: (B1, C3)

In 2017, Ahmad & Sons, a small environmental-testing firm, performed 12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of radon-related health hazards is expected to result in a 6% increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in 2018.

Instructions:

1. Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse holds prices at 2017 levels.

2.         Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse lowers the price of a lead test to $230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to maximize sales revenue

Answer 1

Solution:

1)Prepare a 2018 sales budget for Ahmad & sons assuming that Rouse holds price at 2017 level:

Ahmad & sons Sales budget for the year 2018
Type of test	Number of tests (A)	Price per test (B)	Total sales (C)=(A)*(B)
Random tests	12,932	$290	$3,750,280
Leads tests	14,760	$240	$3,542,400
Total revenue			$7,292,680

Working :

Calculate expected number of tests for the year 2018:

Number of random tests =12,200 +(6% * 12,200)

=12,200 + 732

=12,932

Number of leads tests = 16,400 -(10%*16,400)

=16,400 - 1,640

=14,760

2)

Prepare 2018 sales budget for Ahmed & sons assuming the Rouse lowers the price of a lead test to $230:

Ahmad & sons Sales budget for the year 2018
Type of test	Number of tests (A)	Price per test (B)	Total sales (C)=(A)*(B)
Random tests	12,932	$290	$3,750,280
Leads tests	15,252	$230	$3,507,960
Total revenue			$7,258,240

Calculate expected number of tests for the year 2018:

Number of random tests =12,200 +(6% * 12,200)

=12,200 + 732

=12,932

Number of lead test =16,400 -(7%*16,400)

=16,400 - 1,1,48

=15,252

Total sales revenue is decreased from $7,292,680 to $7,258,240 with decrease in the price of lead test. It should not lower the price of a lead test in 2018 in order to maximize sales revenue.