Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the

Question

Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI is considering lowering the sale price to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year. The marginal corporate tax rate is 40%. Suppose that if GSI drops the price on the Glucoscan 3000 to $99 immediately, it can increase sales over the next year by 30% to 130,000 units.

Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. These strip sales occur on all monitor sales regardless of the price of the monitor. Including the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to:

Explanation / Answer

GSI Incremental EBIT Analysis Details Current price Reduced price Units Sold           100,000            130,000 Unit sales price                   129                       99 Sales Revenue       12,900,000      12,870,000 Cost of Goods sold@50 each         5,000,000         6,500,000 Gross Profit       7,900,000         6,370,000 Yearly Glucose strip sale @$100 each monitor     10,000,000      13,000,000 Gross profit on Glocose strip sale@75%       7,500,000         9,750,000 Total Gross profit/year     15,400,000      16,120,000 Incremental Effect of price drop on EBIT   $   720,000.0

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