The Outback Spectacular show has a shop that sells cowboy style jackets. It has spent $33,000 to purchase 3,000 jackets. Due to changing fashions, they have not been able to sell the jackets at the regular selling price of $20.00. The company is evaluating two alternatives. They could drop the selling price of the jackets to $8 each or they could modify the jackets at a cost of $5,000 and sell them for a total of $32,000.
What would be the effect on profit of modifying the jackets as opposed to selling them for $8 each?

Question

Quizplus · Accepted Answer

If the jackets are sold for $8 each, the total revenue will be $3,000 x $8 = $24,000. The total cost will be $33,000 + $0 = $33,000. The profit will be $24,000 - $33,000 = -$9,000.If the jackets are modified and sold for $32,000, the total revenue will be $32,000. The total cost will be $33,000 + $5,000 = $38,000. The profit will be $32,000 - $38,000 = -$6,000.The difference in profit between the two alternatives is -$9,000 - (-$6,000) = $3,000. Therefore, the effect on profit of modifying the jackets as opposed to selling them for $8 each would be a $3,000 increase.

The Outback Spectacular Show Has a Shop That Sells Cowboy