Vintage Loungers is in the process of preparing a production cost budget for Aug

ID: 2425120 • Letter: V

Question

Vintage Loungers is in the process of preparing a production cost budget for August. Actual costs in July for 200 chaise lounge chairs were: Materials cost $ 6,000 Labor cost 8,000 Rent 2,000 Depreciation 4,000 Other fixed costs 5,000 Total $25,000 Each chair is sold for $140 in July. The company plans to lower the selling price to $130 per chair at which management estimates that sales will increase to 230 chairs. Materials and labor are the only variable costs. Under what situation should the company lower the price of its chaise lounge chairs?

A. If total revenue exceeds totals costs under the new pricing

B. If incremental revenue exceeds the old revenue

C. If incremental costs decrease

D. If incremental profit is a positive number

Explanation / Answer

D. If incremental profit is a positive number

In the present scenario incremental profit is negative hence price should not be lower to $130.

July

Aug (Budget)

Units

200

230

Sales per unit

140

130

Sales value

28000

29900

Material

6000

6900

Labour

8000

9200

Contribution

14000

13800

Rent

2000

Depreciation

4000

Other fixed cost

5000

Profit

3000

2800

Incremental profit

-200