Assume University T-shirt Shop has a selling price of $25 and unit variable cost of $10 for its long-sleeve cotton shirts.Fixed costs total $1,000.University believes increasing its price to $27 its sales volume will drop by 5 percent.If University's sales volume for the month was estimated to be 300 shirts before the price increase, how will net profit be affected by the change in selling price?

Question

Quizplus · Accepted Answer

Before the price increase, the profit is calculated as follows: Sales volume = 300 shirts Selling price per shirt = $25 Variable cost per shirt = $10 Fixed costs = $1,000 Total revenue = 300 shirts * $25 = $7,500 Total variable costs = 300 shirts * $10 = $3,000 Total profit = Total revenue - Total variable costs - Fixed costs = $7,500 - $3,000 - $1,000 = $3,500 After the price increase, the sales volume decreases by 5%, so the new sales volume = 300 shirts - (5% of 300) = 285 shirts. New selling price per shirt = $27 New total revenue = 285 shirts * $27 = $7,695 New total variable costs = 285 shirts * $10 = $2,850 New total profit = $7,695 - $2,850 - $1,000 = $3,845 The change in net profit = New total profit - Original total profit = $3,845 - $3,500 = $345 increase.

Assume University T-Shirt Shop Has a Selling Price of $25