Flash City Inc. manufactures small flash drives and is considering raising the p
ID: 2597814 • Letter: F
Question
Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units. Current Projected Demand 78,000 units 71,000 units Selling price $9.00 $9.75 ncremental cost per unit $6.80 $6.80 Would you recommend the 75-cent price increase? A. Yes, because contribution maran per unit increases. B. O C. D. No, because demand decreased No, because the selling price increases Yes, because operating profits increase.Explanation / Answer
Answer:
Current Situation:
Demand = 78,000 Units
Selling price per unit = $9.00
Cost per unit = $6.80
Operating Profit = 78,000 * (9.00 – 6.80)
Operating Profit = $171,600
Projected Situation:
Demand = 71,000 Units
Selling price per unit = $9.75
Cost per unit = $6.80
Expected Operating Profit = 71,000 * (9.75 – 6.80)
Expected Operating Profit = $209,450
Recommendation:
The Operating Profit will increase by $37,850 ($209,450 - $171,600) on increasing selling price per unit by 0.75 cent which has effect of decrease in demand.
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