Musgrave Corporation has fixed operating costs of $46,000 and variable costs that are 30% of the current sales price of $2.15.At a price of $2.15,Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95,but variable cost per unit won't change.Should it cut its price?
A) No,EBIT decreases by $6,000.
B) No,EBIT decreases by $250.
C) Yes,EBIT increases by $11,500.
D) Yes,EBIT increases by $8,050.
E) Yes,EBIT increases by $5,050.

Question

Quizplus · Accepted Answer

To determine the impact on EBIT (Earnings Before Interest and Taxes) of changing the price, we need to calculate the EBIT before and after the price change.Before the price change:- Sales = 40,000 units * $2.15 = $86,000- Variable Costs = 40,000 units * $2.15 * 30% = $25,800- Fixed Costs = $46,000- EBIT = Sales - Variable Costs - Fixed Costs = $86,000 - $25,800 - $46,000 = $14,200After the price change:- Sales = 50,000 units * $1.95 = $97,500- Variable Costs = 50,000 units * $1.95 * 30% = $29,250- Fixed Costs = $46,000- EBIT = Sales - Variable Costs - Fixed Costs = $97,500 - $29,250 - $46,000 = $22,250Change in EBIT = $22,250 - $14,200 = $8,050Therefore, yes, Musgrave should cut its price because the EBIT increases by $8,050.

Musgrave Corporation Has Fixed Operating Costs of $46,000 and Variable