Mattress Company sells one of its products for $35 each. Sales volume averages 2,400 units per year. Recently, its main competitor reduced the price of its product to $30. Mattress Company expects sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 2,400) is as follows: The non-value-added cost per unit is
A) $4.525.
B) $4.190.
C) $4.875.
D) $3.475.

Question

Mattress Company sells one of its products for $35 each. Sales volume averages 2,400 units per year. Recently, its main competitor reduced the price of its product to $30. Mattress Company expects sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 2,400) is as follows:  The non-value-added cost per unit is
A) $4.525. 
B) $4.190. 
C) $4.875. 
D) $3.475.

Quizplus · Accepted Answer

To maintain the current profit per unit, the company needs to reduce the cost per unit by the decrease in selling price. So, the cost per unit should be reduced by $5 ($35-$30) to maintain the current profit.

$5 decrease in selling price x 2,400 units per year = $12,000 decrease in revenue

To compensate for this loss, the non-value-added cost per unit should be reduced by $5.

Total non-value-added cost for 2,400 units = (($7.50 x 2,400) + $19,200)/2,400 = $10.65

$10.65 non-value-added cost per unit - $5 decrease in non-value-added cost per unit = $5.65 non-value-added cost per unit

The total cost per unit would be $35 - $5.65 = $29.35

Therefore, the non-value-added cost per unit is $4.875 (option C).

Mattress Company Sells One of Its Products for $35 Each