Cabebe Corporation manufactures numerous products, one of which is called Omicron55. The company has provided the following data about this product:?Unit sales (a)140,000?Selling price per unit$54.00?Variable cost per unit36.00?Contribution margin per unit (b)$18.00?Total contribution margin (a) x (b)$2,520,000?Traceable fixed expense2,230,000?Net operating income$290,000Required:a. Management is considering decreasing the price of Omicron55 by 4%, from $54.00 to $51.84. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 140,000 units to 154,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Omicron55 earn at a price of $51.84 if this sales forecast is correct?b.
Assuming that the total traceable fixed expense does not change, if Cabebe decreases the price of Omicron55 to $51.84, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $54.00? (Round your answer to the nearest one-tenth of a percent.)
What will be an ideal response?
a. The profit at the price of $51.84 per unit is computed as follows:
Profit = (P ? V) × Q ? Fixed expenses
Profit = ($51.84 per unit ? $36.00 per unit) × 154,000 units ? $2,230,000
Profit = ($15.84 per unit) × 154,000 units ? $2,230,000
Profit = $2,439,360 ? $2,230,000 = $209,360
b. Profit = (P ? V) × Q ? Fixed expenses
$290,000 = ($51.84 per unit ? $36.00 per unit) × Q ? $2,230,000
$2,520,000 = ($51.84 per unit ? $36.00 per unit) × Q
$2,520,000 = ($15.84 per unit) × Q
Q = $2,520,000 ÷ $15.84 per unit = 159,091 units (rounded up)
Percentage change in unit sales = (159,091 units ? 140,000 units) ÷ 140,000 units = 13.6% (rounded)
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