Question

Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit. Currently Projected Demand 50,000 units 62,500 units Selling price $60 $57 Variable costs per unit $52 $50 Would you recommend the $3 price decrease?

Answer 1

Answer:

Yes decrease in price is recommended.

Explanation:

In the given case the decision will be based on contribution margin.

Contribution margin = Sales - Variable Costs

Contribution margin in case of original sales will be

Sales = 50,000 units X $60 = $3,000,000

Less: Variable Cost = 50,000 X $52 = $2,600,000

Contribution Margin = $3,000,000 - $2,600,000 = $400,000

Contribution Margin In case of Decrease in Price

Sales = 62,500 units X $57 = $3,562,500

Less: Variable Cost = 62,500 X $50 = $3,125,000

Contribution Margin = $3,562,500 - $3,125,000 = $437,500

Since contribution margin has increased price shall be decreased.

Thus it is recommended to decrease the price.