Question

28. Currently, you sell 1,000 units of product Z per month at a price of $40...

28.

Currently, you sell 1,000 units of product Z per month at a price of $40 per unit. The variable costs are: direct materials $10/unit, direct labor $4/unit, and variable overhead $2/unit. Fixed costs are unknown. You are planning to increase the price to $50 per unit. You expect sales volume to decrease by 20% (from the original level of 1,000 units per month) after this price increase. How much will the profit change in the short term if you increase the price?

Group of answer choices

increase by $3,200

decrease by $800

no change

increase by $7,200

decrease by $2,800

Business   Accounting   
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Homework Answers

Answer #1
Current Contribution margin:
Sales revenue 40000 =1000*40
Less: Variable expenses
Direct materials 10000 =1000*10
Direct labor 4000 =1000*4
Variable overhead 2000 =1000*2
Total Variable expenses 16000
Contribution margin 24000
Revised Sales level 800 =1000*(1-20%)
Revised Contribution margin:
Sales revenue 40000 =800*50
Less: Variable expenses
Direct materials 8000 =800*10
Direct labor 3200 =800*4
Variable overhead 1600 =800*2
Total Variable expenses 12800
Contribution margin 27200
Change in Profit 3200 =27200-24000
increase by $3,200 is correct option
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