Hyperion Inc., currently sells its latest high-speed colour printer, the Hyper 5

Question

Hyperion Inc., currently sells its latest high-speed colour printer, the Hyper 500, for $367. Its cost of goods sold for the Hyper 500 is $210 per unit, and this year's sales (at the current price of $367 are expected to be 16,000 units. Hyperion plans to lower the price of the Hyper 500 to $315 one year from now. a. Suppose Hyperion considers dropping the price to $315 immediately, (rather than waiting one year. By doing so it expects to increase this year's sales by 23% to 19,680 units. What would be the incremental impact on this year's EBIT of such a price drop? b. Suppose that for each printer sold, Hyperion expects additional sales of $71 per year on ink cartridges for the three-year life of the printer, and Hyperion has a gross profit margin of 69% on ink cartridges. What is the incremental impact on EBIT for the next three years of dropping the price immediately rather than waiting one year)? a. Suppose Hyperion considers dropping the price to $315 immediately, (rather than waiting one year. By doing so it expects to increase this ear's sales by 23 to 19,680 units. What would be the incremental impact on this year's EBIT of such a price drop The change in EBIT will be s (Round to the nearest dollar

Explanation / Answer

Part A)

The incremental impact on EBIT can be calculated as the difference between the EBIT after decrease in price and EBIT before the decrease. The EBIT under each case would be calculated as:

EBIT = Units*(Selling Price - Cost of Goods Sold)

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Using the information provided in the question, we get,

Gross profit after decrease in price = 19,680*(315 - 210) = $2,066,400 (units have increased)

Gross profit after decrease in price = 16,000*(367 - 210) = $2,512,000

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Incremental Impact on EBIT = 2,066,400 - 2,512,000 = -$445,600

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Part B)

To calculate the incremental impact on EBIT for the next three years, we need to determine the incremental impact on EBIT from ink cartridge sales.

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EBIT from ink cartridge sales (after price decrease) = 19,680*71*69% = $964,123.20

EBIT from ink cartridge sales (before price decrease) = 16,000*71*69% = $783,840

Change in EBIT from ink cartridge sales = 964,123.20 - 783,840 = $180,283.20 or $180,283

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Incremental Impact on EBIT (Year 1) = Change in EBIT from ink cartridge sales + Incremental impact on EBIT from price decrease = $180,283 - $445,600 = -$265,317

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Incremental Impact on EBIT (Year 2) = Change in EBIT from ink cartridge sales = $180,283

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Incremental Impact on EBIT (Year 3) = Change in EBIT from ink cartridge sales = $180,283

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