Question

Thor Lab supplied hospitals with a comprehensive diagnostic kit for $100. At a volume of 100,000 kits, Thor had variable costs of $82 per unit and a profit before income taxes of $350,000. Because of an adverse legal decision, Thor's liability insurance will increase by $800,000. Assuming the volume and other costs are unchanged, what should the new price be if Thor is to make the same $350,000 profit before income taxes?

A. $100.00

B. $108.00

C. $144.44

D. Cannot solve. Fixed costs not known.

Answer 1

Selling price per unit = $100

Increase in fixed cost (Due to increase in liability insurance) = $800,000

number of units sold = $100,000

To maintain the same profit, the burden of increase in fixed cost of $800,000 will be born by 100,000 units. Hence, increase in selling price required = Increase in fixed cost/Number of units sold

= 800,000/100,000

= $8

Hence, selling price to be charged = Original selling price + Increase in selling price

= 100 + 8

= $108

Correct option is (B)