Question

Joanna is looking at her business numbers and making a plan for next year. She feels like her sales margins are too small, but drastic price increases may severely impact her sales volume. Sales totaled 80,000 units this year, resulting in net sales revenue of $320,000. Joanna feels that a $0.25 per unit price increase won’t impact sales, but a $0.50 increase will cause a 20% volume drop. Hence, she is leaning towards only increasing prices by $0.25.

She is planning to invest in new equipment (annual lease expense of $20,000), which will reduce her production costs for each unit manufactured. This year, the unit cost was $2, and Joanna is confident that it will drop by 25% next year.

Discuss Joanna’s business strategy in detail and its impact on the business’s Cost-Volume-Profit graph (how will it change next year). Include any questions you might want to ask Joanna and why they are relevant/helpful to your analysis.

Answer 1

Joanna sold 80000 units and generated sales revenue of $320000.

therefore, sales generated per unit = $320000/ 80000 = $4

After increasing price by $0.25 per unit, sales revenue will be = ( $4 + $0.25) * 80000 = $340000

Therefore, Increase in revenue will be = ($340000 - $320000) = $20000

This year, the unit cost was $2 . After engaging new equipment manufacturing cost will drop by 25%.

Therefore, New manufacturing cost will be = $2 - 25% of $2 = $1.5

After increasing the price by $0.25 the profit per unit was = ( $4 + $0.25 - $2) = $2.25 and total profit

= ( $2.25*80000)=$180000

Now, After engagig new equipment the profit per unit will be = ( $4 + $0.25 - $1.5) = $2.75

and total profit

= ( $2.75*80000)=$220000

So, its evident that the decisions taken by Joanna will be properly beneficial for her business as we can see her profit margin, sales volume both are increasing .