Question

Total fixed costs are $10,000. Unit variable cost is $30. At current selling price of $75, you sell 1,000 units per month. If you reduce the price by 10%, sale volume will increase to 1,300 units.

Compute profit at the original price:

Compute profit at the reduced price:

Should you reduce the price?

-NO, because a lower price always reduces profit

-YES, because revenue will increase by $12,750

-YES, because profit will increase by $3,750

Answer 1

Answer Income Statement Income Stylemeal shows computation of profit / loss earned from the operations. It shows how a company nias it's business Profit Lloss is arrived by deducting Dailyble_and_fixed - Costs from the revenues. 1. Computation of Profit at the original erise Igrome_Statement at ovigional price Particulars Sales (1000 units X $ 75) -: Variable costs Clooo units X $ 30) Amt. ($2 75000 (30000) a contribution Margia - Fixed costs 45000 (10000) Profit 35000 - Profit at Current original price is $ 35000 2. Computation of pipfit at redused puce It company reduced selling prise by 10% they sales Volume incuiequiel by 300 units. · New Selling Price : $ (75-10% of 75) = $_(75 - 7.5) = $ 67.5

Income Statement at reduced price Amb. ) 87750 |(39000) - Particulars Sales (1300_49143 x$_67.50) -; Vareble costs €1300 yoits x $ 30) Contribution Magia - Fixed costs Profit 48750 (10000) 38750 - i Profit at reduced price is $38750 3. Should we reduce the price -(C) YES, because profit will increase by $3750 As per we analysis, (vailable costing), it 97 61940ization covers its fixed costs then they should ignore the fixed costs and sell the product at lower price and sell more units to earn maximum pofit In the given_queshongsame the company has covers its fixel corts It will help a company to sell more units of protect at the lower price to earn more profils such principle helps as to earn extra profit of $3750 ie ($38,750 - 35000) . We should reduce the price of a product to earn exbio profit of $3750. .