Quick Change and Fast Change are competing oil change businesses.Both companies have 5,000 customers.The price of an oil change at both companies is $20.Quick Change pays its employees on a salary basis,and its salary expense is $40,000.Fast Change pays its employees $8 per customer served.Suppose Quick Change is able to lure 1,000 customers from Fast Change by lowering its price to $18 per vehicle.Thus,Quick Change will have 6,000 customers and Fast Change will have only 4,000 customers. Select the correct statement from the following.
A) Quick Change's profit will increase while Fast Change's profit will fall.
B) Fast Change's profit will fall but it will still earn a higher profit than Quick Change.
C) Profits will decline for both Quick Change and Fast Change.
D) Quick Change's profit will remain the same while Fast Change's profit will decrease.

Question

Quizplus · Accepted Answer

Quick Change's profit will increase because it will serve more customers at a lower cost of $18 compared to the original cost of $20. Its total revenue from oil changes will increase from $100,000 to $108,000 ($18 x 6,000). Its total cost of salaries will remain the same at $40,000, resulting in a profit of $68,000 ($108,000 - $40,000). 
On the other hand, Fast Change's profit will fall because it loses 1,000 customers and will only serve 4,000 customers now. Its total revenue from oil changes will decrease from $100,000 to $80,000 ($20 x 4,000). Its total cost of salaries will increase to $32,000 ($8 x 4,000), resulting in a profit of $48,000 ($80,000 - $32,000), which is lower than Quick Change's profit of $68,000. Therefore, the correct statement is A.

Quick Change and Fast Change Are Competing Oil Change Businesses