Answer:
A) Current revenues = $600,000
Predicted revenues = $600,000
B) Current variable cost = $7,000
Predicted variable cost = $9187.5
C) Current total contribution margin = $593,000
Predicted total contribution margin = $590,812.5
Current product margin = $550,000
Predicted product margin = $547,812.5
I would recommend that she shouldn't decrease the price.
Explanation:
A) Current revenues = $30 × 20000 tests = $600,000
Predicted revenues; She is thinking of lowering her price by 20 percent and also raising her current volume by 25 percent, thus;
Predicted revenues = (100% - 20%) × $30 × 20000 × (100% + 25%) = $600,000
B) Current variable cost = $7,000
she expects her variable cost per test will go up by 5 percent, thus;
Predicted variable cost = (7000/20000) × (100% + 5%) × 20000 × (100% + 25%) = $9187.5
C) Current total contribution margin = $600000 - $7,000 = $593,000
Predicted total contribution margin = $600000 - $9187.5 = $590,812.5
Fixed cost = $50000 - $7,000 = $43,000
Thus;
Current product margin = $593,000 - $43,000 = $550,000
Predicted product margin = $590,812.5 - $43,000 = $547,812.5
The predicted product margin is lesser than the current one, so my recommendation to her would be that she shouldn't decrease the price. This is because the lower selling price and higher volume does not lead to an increase in the revenue derived from sales, but instead increases the variable costs, which in turn causes a decrease in product margin.
