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 $6,000 was conducted, and it indicated that the company could increase the price of the product by $2.02 with no decrease in unit sales; the current price is $9.70. Variable costs for the product are $4.50 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $11,960 to $16,520. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Explanation / Answer

The Indifference Pooint =

= ( 9.7 - 4.5 ) * X + 11,960 = ( 9.7 +2.02 - 4.5 ) * X + 16,520, where X = number of units indifferent point.

= 5.2 * X + 11960 = 7.22 * X + 16520

= 2.02 * X = 16520 - 11960 = 4560

= X = 4560 / 2.02 = 2257.425 or 2257 units

The Indifferent point number of units = 2257.

Cross verification:

before survey = 9.7 * 2257.425 - 4.5 * 2257.425 - 11960 = - $ 221.39

after survey = 11.72 * 2257.425 - 4.5 * 2257.425 - 16520 = - $ 221.39

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