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 $6,000 was conducted, and it indicated that the company could increase the price of the product by $2.02 with no decrease in unit sales; the current price is $9.70. Variable costs for the product are $4.50 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,960 to $16,520. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

X Company would be indifferent between modifying the product and not modifyig the product at that sales level where total profit is equal under either option.

Let the sales level be q.

( 9.70 - 4.50) q - 11,960 = ( 11.72 - 4.50) q - 16,520 or

5.20 q - 11,960 = 7.22 q - 16,520 or

q = 4,560 / 2.02 = 2,258 units

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