Answer:
The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.
Explanation:
Sales price per unit = (400,000 / 5,000)
Sales price per unit = $80
Sales (5000 x 80) = 400000
Less Variable Cost 240000
Contribution Margin 160000
Less; Fixed Cost <u> 90000</u>
Profit <u> 70,000</u>
Management Consideration 1
When we Increase price by 10%
Increase selling price = 80 + 10/100 * 80
=$68
Sales (5000 x 68) = 440000
Less Variable Cost 240000
Contribution Margin 200000
Less; Fixed Cost <u> 90000</u>
Profit <u>110,000</u>
Management Consideration 2
When Variable Cost is reduced to 55% of sales
New Variable cost = 80 * 55/100
=$44
Sales (5000 x 68) = 400000
Less Variable Cost (44 * 5000) 220000
Contribution Margin 180000
Less; Fixed Cost <u> 90000</u>
Profit <u> 900,000</u>
Conclusion
The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.
