Question

Johnson currently sells 15,000 units a month for $50 each, has variable costs of $20 per unit, and fixed costs of $300,000. Gorfin is considering increasing the price of its units to $60 per unit. This will not affect fixed costs, but demand is expected to drop 20%.

(True/False) If Johnson increases the price of its product, then profit will increase $150,000.

Answer 1

Profit before change in Selling price.

Contribution margin per unit = Sales price - Variable cost per unit

= $50 - $20

= $30

Profit = (Contribution margin per unit * Units) - Fixed costs

= ($30 * 15,000) - $300,000

= $450,000 - $300,000

= $150,000

Profit after change in Selling price.

Revised selling price = $60

Revised unit sales = 15,000 * 0.80

= $12,000 units

Revised contribution margin per unit = $60 - $20

= $40

Profit = ($40 * 12,000) - $300,000

= $480,000 - $300,000

= $180,000

Profit will increase by $30,000 ($180,000 - $150,000).

Answer is false.