The following information pertains to Ewing Company's three products: Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will

A) decrease by £2,070.
B) increase by £1,200.
C) decrease by £270.
D) increase by £2,640.

Question

The following information pertains to Ewing Company's three products: Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will

A) decrease by £2,070. 
B) increase by £1,200. 
C) decrease by £270. 
D) increase by £2,640.

Quizplus · Accepted Answer

Discontinuing product F has no effect on the profits of the company since the sales revenue and costs associated with F are not given in the information provided.

Increasing the production of product E to 2,200 units per month will lead to an increase in total revenue, since the number of units sold has increased. However, the selling price has been reduced by £0.80 per unit, resulting in a decrease in revenue per unit. The net effect on revenue will depend on the extent to which the increase in units sold offsets the decrease in selling price per unit.

Total revenue before the change in production = 2,000 units x £11 = £22,000
Total revenue after the change in production = 2,200 units x £10.20 = £22,440

The increase in revenue is £440.

Total cost of production will increase since E's production has increased, but it is not specified by how much.

Therefore, the only possible answer is C: Decrease by £270, since the cost of production has increased but the revenue increase of £440 does not offset it, leading to a net decrease in profits.

The Following Information Pertains to Ewing Company's Three Products: Assume