X Company is considering a modification to one of its main products that would m

Question

X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $5,600 was conducted, and it indicated that the company could increase the price of the product by $2.90 with no decrease in unit sales; the current price is $10.52. Variable costs for the product are $3.94 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $10,960 to $15,370. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

Sales level at which the company will remain indifferent

= Increase in fixed cost / increase in contribution per unit

= $4410 / $2.90

= 1521 units

Note :

The research cost has already been incurred and is irrelevant for finding the sales indifference point.

Current Proposed Selling price per unit $10.52 10.52 + 2.9 $     13.42 variable cost per unit $ 3.94 $       3.94 contribution per unit $ 6.58 $       9.48

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