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 $6,600 was conducted, and it indicated that the company could increase the price of the product by $2.86 with no decrease in unit sales; the current price is $9.22. Variable costs for the product are $3.62 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,540 to $15,460. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

Modifying the product Not Modifying the product Current unit sale price 9.22 9.22 Increase in unit price 2.86 Increased unit Sale price 12.08 9.22 Less:Unit Variable cost 3.62 3.62 Contribution 8.46 5.6 Fixed costs 15460 11540 Indifference level of sales volume will be the equation that satisfies the following: If x is that level,then 8.46x-15460=5.6x-11540 Solving for x, we get x= 1370.63 units Verification @ 1370.63 units Sales 16557.21 12637.209 Less:Unit Variable cost 4961.68 4961.68 Contribution 11595.53 7675.53 Fixed costs 15460 11540 Net Income -3864.47 -3864.47 Net Income/Loss will be the same at the indifference level of 1370.63 or 1371 units of sales volume At this unit sales level(1371) X Company can be indifferent between modifying the product and not modifying it

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