Danielle sells a single product at $20 per unit. The firm's most recent income statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of $400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will experience:

Question

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The current total revenue is (100,000 x $20) = $2,000,000. The current total variable costs are $800,000, leaving a contribution margin of $1,200,000 to cover the fixed costs of $400,000 and provide a profit of $800,000 (net income).

If the selling price drops by $4 to $16 per unit and sales volume increases by 20%, the new unit sales volume will be 120,000 units. The new total revenue will be (120,000 x $16) = $1,920,000. The new total variable costs will still be $800,000, leaving a contribution margin of $1,120,000 to cover the fixed costs of $400,000 and provide a profit of $720,000 (net income).

The profit drop is ($800,000 - $720,000) = $80,000. Therefore, the answer is (C) a $240,000 drop in profit.

Danielle Sells a Single Product at $20 Per Unit