Question

Presented below is the income statement of Total Inc. The income statement is based on sales of 100,000 units at $20 per unit.

Total estimates that 80% of cost of goods sold is variable, and 80% of operating expenses is fixed.

Sales $2,000,000
Less: COGS $600,000
Gross Margin $1,400,000
Less: Operating expenses $500,000
Net income $900,000

Total is considering lowering the sales price in order to increase sales. Management believes that if it reduces the selling price by 10%, then sales in units will increase by 10%.

Assuming Total reduces the selling price by 10%. How many units would Total have to sell to earn the same total contribution margin prior to the sell price reduction?

Answer 1

rate positively ..

				Fixed	Variable	Per unit variable cost
		Sales	2000000
		COGS	600000	120000	480000	4.80
		Operating expenses	500000	400000	100000	1.00
		Net income	900000			5.80
		Sales =	2000000
		Variable cost =	580000
		contribution margin	1420000
		If sales price is reduced by 10%. Therefore revised sales price per unit = 20*90%=							18
		Revised contribution margin = (18-5.8)/18				67.78%
		Existing fixed cost =		520000
		Contribution margin =		1420000
		Total		1940000
		Revised sales to achieve the contribution margin target = 1940000/67.78%							2862295
		Price per unit =							18
		Number of unit to sale =							159016