Elite Design, Inc. sells customized handbags. Currently, they sell 30,000 handbags annually at an average price of $79 each. They are considering adding a lower-priced line of handbags which sell for $45 each. Elite Design estimates they can sell 12,000 of the lower-priced handbags but will sell 4,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

Question

Quizplus · Accepted Answer

The calculation for the additional sales from the lower-priced handbags should account for the new sales generated by the lower-priced handbags and the reduction in sales from the higher-priced handbags. The sales from 12,000 lower-priced handbags at $45 each is $540,000. The reduction in sales from selling 4,000 fewer higher-priced handbags at $79 each is $316,000 ($79 * 4,000). The net increase in sales is the difference between these two amounts, which is $224,000 ($540,000 - $316,000).