A small business produces a single product and reports the following data:
$$\begin{array} { | l | l | l | }
\hline \text { Price } & \$ 10.59 & \text { per unit } \
\hline \text { Variable cost } & \$ 5 & \text { per unit } \
\hline \text { Fixed cost } & \$ 24,000 & \text { per month } \
\hline \text { Volume } & 13,000 & \text { per month } \
\hline
\end{array}$$
If the company reduces its price to $7.75,it believes that the volume will go up to 15,000 units.
How would this change affect operating profit?

Question

A small business produces a single product and reports the following data:
$$\begin{array} { | l | l | l | } 
\hline \text { Price } & \$ 10.59 & \text { per unit } \
\hline \text { Variable cost } & \$ 5 & \text { per unit } \
\hline \text { Fixed cost } & \$ 24,000 & \text { per month } \
\hline \text { Volume } & 13,000 & \text { per month } \
\hline
\end{array}$$
If the company reduces its price to $7.75,it believes that the volume will go up to 15,000 units.
How would this change affect operating profit?

Quizplus · Accepted Answer

The operating profit at the original price is $(10.59 - 5) \times 13,000 - 24,000 = 30,670$. At the reduced price, it is $(7.75 - 5) \times 15,000 - 24,000 = -750$. The change in profit is $-750 - 30,670 = -31,420$.

A Small Business Produces a Single Product and Reports the Following