Question

Morgan Technologies sells a single product at $30 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of $720,000, and fixed costs of $810,000. If a $6 drop in selling price will boost unit sales volume by 20%, the company will experience:

Answer 1

Answer:

$240,000 drop in profits.

Explanation:

The company's variable cost per unit is:

$VC = \frac{720,000}{80,000} =\ 9/unit$

Initially, with a sales volume of n = 80,000 units at $30 each, the company's profit was:

$P_1=(price -VC)*n-FC\\P_1 = (\ 30-\ 9)*80,000-\ 810,000\\P_1=\ 870,000$

After price drops to $24 per unit, and sales increase by 20%, the profit is:

$P_2=(price -VC)*n_1*1.2-FC\\P_2 = (\ 24-\ 9)*80,000*1.2-\ 810,000\\P_2=\ 630,000$

The change in profit is:

$\Delta P = P_2-P_1\\\Delta P =\ 870,000-\ 630,000\\\Delta P =\ 240,000$

The company will experience a $240,000 drop in profits.