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L​&M Manufacturing produces a single product that sells for​ $16. Variable​ (flexible) costs per unit equal​...

L​&M Manufacturing produces a single product that sells for​ $16. Variable​ (flexible) costs per unit equal​ $11.20. The company expects the total fixed ​(capacity ​related) costs to be​ $7,200 for the next month at the projected sales level of​ 20,000 units. In an attempt to improve​ performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that​ L&M Manufacturing's management believes that a​ 10% reduction in the selling price will result in a​ 30% increase in sales. If this proposed reduction in selling price is​ implemented, then: A. profit will increase by​ $32,000 in a month. B. profit will increase by​ $12,800 in a month. C. profit will decrease by​ $32,000 in a month. D. profit will decrease by​ $12,800 in a month.

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Answer #1

Final answer

Select - (D) ........  Profit wiill decrease by 12800 in a month

Explanation

Projected sales level = 20000 Units per month.

New selling price = 16 - 10% of 16 = 14.40

Variable cost = 11.20

Contribution per Unit = Selling price - Variable cost = 14.40 - 11.20 = 3.20

Unit sales = 20000 + 30% of 20000 = 26000 Units

Total Contribution = 26000 Units * 3.20 = 83200

Contribution ( with out change in selling price ) = 20000 Units * ( 16 - 11.20 ) = 96000

Thus profit decreases by 96000 - 83200 = 12800

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