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 $7,900 was conducted, and it indicated that the company could increase the price of the product by $2.94 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 $11,630 to $15,670. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

Market reasearch cost is a sunk cost so not considered in the decision making Details Without Modification With Modification Unit Sales Price              10.44                  13.38 Unit Variable cost                 3.94                    3.94 Unit Contribution margin                 6.50                    9.44 Fixed cost      11,630.00          15,670.00 Assume the indifferent level is k units Net Operating Income at sales vol k 6.5k-11630 9.44k-15670 So 6.5k-11630=9.44k-15670 2.94k=4040 k=1374 So at 1374 unit sales level there will be indifference between   modifying and not modifying the product.

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