Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit.

Would you recommend the $3 price decrease?
A) Yes, because demand decreases.
B) No, because the selling price decreases.
C) Yes, because operating income increases.
D) No, because contribution margin per unit increases.

Question

Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit.

Would you recommend the $3 price decrease?

Would you recommend the $3 price decrease?
A) Yes, because demand decreases. 
B) No, because the selling price decreases. 
C) Yes, because operating income increases. 
D) No, because contribution margin per unit increases.

Quizplus · Accepted Answer

Old operating income = $400,000 (50,000 × ($60 - $52)). New operating income = $437,500 (62,500 × ($57 - $50). Net increase in operating profits = $37,500 ($437,500 - $400,000).

Velim Electronics Manufactures Electric Shavers and Is Considering Decreasing the Price