Selwyn Fabrics sold 60,000 yards of upholstery fabric for $22 per yard.The company's unit product cost using process costing is $5 per yard and the company has fixed costs of $86,000 per month.The company predicts that a $2 decrease in the selling price will generate a 12% increase in sales during the next period.If the company lowers the price, which of the following will occur in the next period?

Question

Quizplus · Accepted Answer

First, let's calculate the current profit:

Revenue from sales = 60,000 yards x $22 per yard = $1,320,000
Variable costs = 60,000 yards x $5 per yard = $300,000
Fixed costs = $86,000
Total costs = $386,000

Profit = Revenue - Total Costs = $934,000

Now, let's calculate the profit if the selling price decreases by $2 and sales increase by 12%:

New selling price = $22 - $2 = $20 per yard
New sales volume = 60,000 yards x 1.12 = 67,200 yards

New revenue from sales = 67,200 yards x $20 per yard = $1,344,000
New variable costs = 67,200 yards x $5 per yard = $336,000
Fixed costs = $86,000
Total costs = $422,000

New profit = New Revenue - Total Costs = $922,000

The profit has decreased by $12,000 compared to the current profit. Therefore, the correct answer is B. Note that none of the other choices are true based on the information provided.

Selwyn Fabrics Sold 60,000 Yards of Upholstery Fabric for $22