Question

The product manager for ointments at NAT Corporation was reviewing pricing options for their flagship product, Rash-Away. The data in the table below is from the last quarter sales. The product manager has proposed a 10% price reduction, and her marketing research indicates sales volume will increase by 350,000 units next quarter with the price cut. Given this scenario, would you recommend supporting the price cut? Answer the questions below to help your conclusion.

	Rash-Away
Unit price	$2.00
Unit variable costs	$1.40
Unit gross profit margin	$0.60
Unit volume	1,000,000 units

1. What is the current Gross Profit Margin for Rash-Away? (calculate for either per unit or total)

2. Calculate the Gross Profit Margin if there is a 10% price cut and a sales increase of 350,000 units.       Note the variable per unit cost will stay the same.

3. Based on your answers to part a and b, do you recommend the price cut? Why or why not?

Answer 1

a. Current Gross Profit Margin for Rash-Away

Particulars	Per Unit	$
Sales (1,000,000 * $2.00)	$2.00	2,000,000
Less: Variable Cost (1,000,000 * $1.40)	$1.40	1,400,000
Gross Profit Margin (1,000,000 * $0.60)	0.60	600,000

b. Gross Profit Margin if there is a 10% price cut

Particulars	Per Unit	$
Sales (1,350,000 * $1.80)	$1.80	2,430,000
Less: Variable Cost (1,350,000 * $1.40)	$1.40	1,890,000
Gross Profit Margin (1,350,000 * $0.40)	0.40	540,000

Working Notes:

1, Selling Price per unit = $2.00 - ($2.00 * 10%) = $1.80 per unit.

2. Sales Unit after sales increase = 1,000,000 Units + 350,000 Units = 1,350,000 Units

c. No, it is not recommended to implement price cut. Because, Gross profit is reduced by $60,000 ($540,000 - $600,000) when price cut is implemented.

All the best...