Zeal Company sells a product for $500 per unit. Its market share is 30 percent. The marketing manager feels that the market share can be increased to 35 percent with a reduction in price to $480. The product is currently earning a profit of $60 per unit. The president of Zeal Company feels that the $60 profit per unit must be maintained. What is the original cost per unit?

Question

Quizplus · Accepted Answer

Let the original cost per unit be $x.

Profit per unit = Selling price per unit - Cost per unit 
$60 = $500 - $x

Thus, x = $440.

Now, if the selling price is reduced to $480 and profit per unit is to be maintained at $60, then the cost per unit would be:

Cost per unit = Selling price per unit - Profit per unit 
Cost per unit = $480 - $60 = $420

At this cost per unit, the profit percentage would be:

Profit percentage = (Profit per unit / Cost per unit) x 100 
Profit percentage = (60/420) x 100 = 14.28%

Now, let's calculate the profit per unit at the new market share of 35%:

Profit per unit = Selling price per unit - Cost per unit 
Profit per unit = $480 - $420 = $60

At this profit per unit, the total profit would be:

Total profit = Profit per unit x Number of units sold 
Total profit = $60 x (35% of total market) 
Total profit = $60 x 0.35 x Total market

We know that the original market share was 30%, so:

Total market = (Original market share / New market share) x Market with new price

Total market = (30% / 35%) x Market with new price 
Total market = 0.857 x Market with new price

Now, we can set the original profit equal to the new profit and solve for the market with new price:

$60 x (30% of total market) = $60 x (35% of 0.857 x Market with new price)

Solving for Market with new price gives us:

Market with new price = 292.5

This means that the original market size was:

Original market size = (30% / 35%) x 292.5 
Original market size = 250

Thus, the total profit at the original market size and price would be:

Total profit = Profit per unit x Number of units sold 
Total profit = $60 x 0.3 x 250 
Total profit = $4500

Therefore, Zeal Company can maintain a profit of $60 per unit at the original market size and price of $500 per unit.The best choice is C.

Zeal Company Sells a Product for $500 Per Unit