Question

The President of XYZ Ltd. is unhappy with the quality of the product and wants to...

The President of XYZ Ltd. is unhappy with the quality of the product and wants to make some changes in 2021. The current data, based on sales of $100,000 are:

Sales price per unit $10.00

Total VC per unit $5.50

Total FC $250,000

She proposes improving the quality of the product by increasing variable costs by $0.75/unit and raising the selling price per unit by $0.50. She expects that sales will increase by 7.5%. What would be the increase in pre-tax income if these changes are made?

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Answer #1

answer)if the proposed change implemented,the total loss wil reduced by $687.50

calculation:-

particulars before change($) after change($)
sales revenue 100000 112875
less:variable costs 55000 67187.5
contribution 45000 45687.5
less:fixed costs 250000 250000
net income/(loss) -205000 -204312.5

note:-

1)selling price per unit after change=$10+$0.50=$10.50

2)variable cost per unit after change=$5.50+$0.75=$6.25

3) units sold before change=$100000/$10=10000 units

units sold after change=10000 units +7.5%=10750 units

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