A facility services firm has a general monthly price for janitorial services of
ID: 2637539 • Letter: A
Question
A facility services firm has a general monthly price for janitorial services of $160 per 1000 square
feet. The service company has a variable cost of $90 a month per 1000 square feet.
? What is the current gross margin?
? A 10% price cut is being considered, what would be the new price and the volume hurdle to
be cleared for the price change to improve profits?
A 10 % price increase is being considered, what would be the new price and what would be
the allowable loss in sales volume for the price change to improve profits?
Explanation / Answer
Gross margin = (Profit / Sales) * 100
Profit = Sales - variable cost = $160 - $90 = $70
Current gross profit margin = ($70 / $160) * 100 = 43.75% (Answer)
Let us consider 100 batchs of product were sold. Therefore, the total profit is $70 * 100 = $7,000.
If 10% price is reduced, the selling price would be $160 - $160 *10% = $160 - $16 = $144
New profit would be $144 - $90 = $54.
Therefore, the total volume to recover the loss would be
$54 * volume = $7,000
Volume = 129.62
Increasing volume hurdle to improve profit = 129.62 - 100 = 29.62%. (Answer)
10% price is increased. Therefore the new price is $160 + 10% OF $160 = $176
New profit is $176 - $90 = $86
Therefore, the total volume to match the profit
$86 * Volume = $7,000
Volume = 81.39
Loss in sales volume hurdle to match the profit 100 - 81.39 = 18.61% (Answer)
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