Question

Brainchip Holdings Ltd sells an electrical device for $470. Costs for this device are $430. A competitor is bringing a new similar device to market that will sell for $445. Management believes it must lower the price to $445 to compete in the market for these devices. Russell Smith, the Marketing Manager, believes that the new price will cause sales to increase by 12%, even with a new competitor in the market. Sales of the device for Brainchip Holdings Ltd are currently 180,000 devices per year.

Calculate the change in operating income if Russell Smith is correct and only the sales price is changed. Show all workings.

Answer 1

Calculation of change in operating income:

Particulars	existing plan	proposed plan
Sales	$84,600,000 ($470×180000)	$89,712,000 ($445×201600)
Less: cost	$77,400,000 ($430×180000)	$86,688,000 ($430×201600)
Operating income	$7,200,000	$3,024,000

Change in operating income = ($4,176,000)

($7,200,000-$3,024,000)

In the proposed plan sales price is decreased to $445 and sales quantity will increase by 12%

Total sales in proposed plan =201,600 (180000+12%)