Capital One produces a single product,which it sells for $8.00 per unit.Variable costs per unit equal $3.20.The company expected total short-term fixed costs to be $7,200 for the coming month,at the projected sales level of 20,000 units.Management is considering several alternative actions designed to improve operating results.In conjunction with this,they have created a profit-planning model,which can be used to evaluate different scenarios.
Management believes that a 10% reduction in the selling price will increase sales volume by 10%.If this plan is implemented,then:

Question

Quizplus · Accepted Answer

If the selling price is reduced by 10% to $7.20 per unit, the new contribution margin per unit becomes ($7.20 - $3.20) = $4.00. At the projected sales level of 20,000 units, the total contribution margin will be 20,000 units × $4.00 = $80,000.

Total cost will be equal to the sum of variable cost and fixed cost which results in ($3.20 × 20,000) + $7,200 = $80,000.

Therefore, profit will be equal to total contribution margin minus total cost, which is $80,000 - $80,000 = $0.

Hence, the profit should remain approximately the same if the plan of reducing the selling price by 10% is implemented.

Capital One Produces a Single Product,which It Sells for $8