Estrella Corporation has a unit selling price of $400, unit variable cost of $250, and total fixed costs of $200,000. The company is currently operating at full capacity, producing and selling 5,000 units annually. The company is considering the following alternatives, both of which will allow the company to continue to produce and sell at full capacity.
Alternative 1: Decrease the unit selling price by 5% while embarking on a cost reduction plan to also decrease unit variable costs by 10% and the fixed costs by $25,000.
Alternative 2: Decrease the unit selling price by 3% while decreasing the unit variable cost by 12%, but incurring an increase in the fixed costs of 3%. Determine the profitability of each alternative using the contribution margin income statement format and identify the alternative that is most profitable to management.

Question

Estrella Corporation has a unit selling price of $400, unit variable cost of $250, and total fixed costs of $200,000. The company is currently operating at full capacity, producing and selling 5,000 units annually. The company is considering the following alternatives, both of which will allow the company to continue to produce and sell at full capacity. 
Alternative 1: Decrease the unit selling price by 5% while embarking on a cost reduction plan to also decrease unit variable costs by 10% and the fixed costs by $25,000. 
Alternative 2: Decrease the unit selling price by 3% while decreasing the unit variable cost by 12%, but incurring an increase in the fixed costs of 3%. Determine the profitability of each alternative using the contribution margin income statement format and identify the alternative that is most profitable to management.

Quizplus · Accepted Answer

The Answer of Estrella Corporation has a unit selling price of $400, unit variable cost of $250, and total fixed costs of $200,000. The company is currently operating at full capacity, producing and selling 5,000 units annually. The company is considering the following alternatives, both of which will allow the company to continue to produce and sell at full capacity. 
Alternative 1: Decrease the unit selling price by 5% while embarking on a cost reduction plan to also decrease unit variable costs by 10% and the fixed costs by $25,000. 
Alternative 2: Decrease the unit selling price by 3% while decreasing the unit variable cost by 12%, but incurring an increase in the fixed costs of 3%. Determine the profitability of each alternative using the contribution margin income statement format and identify the alternative that is most profitable to management.

Estrella Corporation Has a Unit Selling Price of $400, Unit