Answer the following questions using the information below:
Ghan Manufacturing produces a single product that sells for $80.Variable costs per unit equal $32.The company expects total fixed costs to be $72 000 for the next month at the projected sales level of 2000 units.In an attempt to improve performance,management is considering a number of alternative actions.Each situation is to be evaluated separately.
-Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales.If this proposed reduction in selling price is implemented:

Question

Quizplus · Accepted Answer

The original selling price is $80, and a 10% reduction would make it $72. The new sales volume would be 2200 units (10% increase from 2000). The new revenue would be 2200 units * $72 = $158,400. The variable cost would be 2200 units * $32 = $70,400. The contribution margin would be $158,400 - $70,400 = $88,000. Subtracting fixed costs of $72,000, the operating profit would be $16,000. Originally, the operating profit was $32,000 (2000 units * ($80 - $32) - $72,000). The decrease in operating profit is $32,000 - $16,000 = $16,000.

Answer the Following Questions Using the Information Below