Question 2: i. P1 is $10, VC is $2. Q1 (initial sales) is 1,000 units. Please fi

Question

Question 2: i. P1 is $10, VC is $2. Q1 (initial sales) is 1,000 units. Please find Q2 (nevw sales) that would make a 10% price cut break even. (15 points) ii. P1 is $10, VC is $2. Q1 (initial sales) is 1,000 units. Please find Q2 (new sales) that would make a 10% price increase break even. (15 points) Question 3: How much would sales have to increase to make a 5% price reduction profitable for the following product (20 points): Current Price . Current Sales (monthly) Variable Cost Per Unit . Fixed Overhead (monthly) .Profit (monthly) $10 1000 units $8 $1,600 $400 What are the profit implications for a 40% actual sales increase? (20 points)

Explanation / Answer

Question 2:

(a) Break even point = Fixed cost/(price - Variable cost)

1000 = Fixed cost/(10-2)

Fixed cost = 8*1000 = 8,000

Now price is cut by 10%, so new price is 10*(1-0.1) = $9 and variable cost is still $2

Breakeven = 8000/(9-2) = 1,142.85 units

Q2 ( New Sales) = 1,143 units (Since we cannot have a fractional unit)

(b)

Break even point = Fixed cost/(price - Variable cost)

1000 = Fixed cost/(10-2)

Fixed cost = 8*1000 = 8,000

Now price is increased by 10%, so new price is 10*(1+0.1) = $11 and variable cost is still $2

Breakeven = 8000/(11-2) = 888.89 units

Q2 (New Sales) = 889 units (Since we cannot have a fractional unit)

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