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Glucose Scan Incorporated (GSI)currently sells its latest glucose monitor,the Glucoscan 3000,to diabetic patients for $129.GSI plans on lowering their price next year 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.
-Suppose that if GSI drops the price on the Glucoscan 3000 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%.Considering the increase in the sale of testing strips,the incremental impact of this price drop on the firm's EBIT is closest to:
A)a decline of $1.5 million.
B)a decline of $0.7 million.
C)an increase of $0.7 million.
D)an increase of $1.5 million.

Question

Quizplus · Accepted Answer

The price drop increases unit sales by 30,000 units, generating additional revenue from testing strips. The gross profit from strips is $75 per unit (75% of $100). The additional 30,000 units generate $2.25 million in gross profit from strips. The price drop reduces revenue per unit by $30, resulting in a $3 million loss on the original 100,000 units. The net impact is a $0.7 million increase in EBIT ($2.25 million - $3 million + $1.5 million from additional units).

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