Musgrave Corporation has fixed operating costs of R46,000 and variable costs that are 30% of the current sales price of R2.15.At a price of R2.15, Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from R2.15 to R1.95, but variable cost per unit won't change.Should it cut its price?

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By cutting the price to R1.95, Musgrave sells 50,000 units. Revenue is 50,000 * R1.95 = R97,500. Variable costs are 50,000 * (30% of R2.15) = R32,250. Fixed costs remain R46,000. EBIT = Revenue - Variable Costs - Fixed Costs = R97,500 - R32,250 - R46,000 = R19,250. Initially, EBIT was (40,000 * R2.15) - (40,000 * 30% of R2.15) - R46,000 = R11,200. The increase in EBIT is R19,250 - R11,200 = R8,050.

Musgrave Corporation Has Fixed Operating Costs of R46,000 and Variable