Question

Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per unit equal $3.20. The company expects short-term fixed costs to be $7,200 for the coming month, at the projected sales level of 20,000 units. Management is considering several alternative actions designed to improve operating results. In conjunction with this, they have created a profit-planning (that is, a CVP) model, which can be used to evaluate different scenarios. Capital One's management believes that a 10% reduction in the selling price will increase sales volume by 10%. If this plan is implemented, then operating profit should: Decrease by approximately $16,000 per month.

Decrease by approximately $8,000 per month.

Increase by approximately $16,000 per month.

Remain approximately the same.

Increase by approximately $8,000 per month.

Answer 1

Selling price = $ 8

Selling quantity = 20,000 units

Variable cost = 3.2

Contribution margin = 8 - 3.2 = $4.8

Profit = 20,000*4.8 = $96,000

Net operating profit = 96,000 - 7,200 = 88,800

Reduced selling price = 8 - 10%of 8 = $7.2

Increased selling quantity = 20,000 + 10%of20,000

= 22,000 units

Variable cost = $3.2

Contribution margin = 7.2 - 3.2 = $4

Profit= 22,000*4 = 88,000

Net operating profit = 88,000 - 7,200 = $80,800

Fixed cost will remain the same in both the cases.

Therefore the operating profit will reduce by $8,000 per month ( 88,800 - 80,800)

Therefore the correct option is 2nd

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