X Company is considering a modification to one of its main products that would m

Question

X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $8,000 was conducted, and it indicated that the company could increase the price of the product by $2.56 with no decrease in unit sales; the current price is $10.44. Variable costs for the product are $3.94 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $10,290 to $13,840. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

Existing selling price = 10.44

existing variable cost =3.94

existing contribution = 10.44 -3.94 ,= 6.50

Increase in contribution on account of change in selling price = 2.56

Existing Fixed cost = 10290

fixed cost after increased sale = 13840

Increase in fixed cost = 13840 - 10290, = 3550

Indifferent point can be calculated as = Change in fixed cost / change in contribution

= 3550 / 2.56 , = 1387

at 1387 units company will be indifferent at modifying and not modifying

i.e it should modify only after it reaches 1387

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