Question

Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised profits are expected to (increase/decrease) by $__________ per year. (Enter the profit increase or decrease as a whole number.)

Answer 1

Answer:

If the company decides to raise the selling price by $0.5, net income will decrease by $45,000

Explanation:

Giving the following information:

Unitary variable cost= $3

Number of units sold= 150,000

Selling price= $6.5

To calculate the effect on income, we need to use the following formula:

Net income= number of units sold*unitary contribution margin - fixed costs

Previous:

Net income= 150,000*3.5 - 350,000

Net income= $175,000

After:

Net income= 120,000*4 - 350,000

Net income= $130,000

Unitary contribution margin= 7 - 3= 4

Number of units sold= 150,000*0.8= 120,000

If the company decides to raise the selling price by $0.5, net income will decrease by $45,000