Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the

Question

Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year. Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. The incremental impact of this price drop on the firms EBIT is closest to:

Explanation / Answer

GSI ,Glucoscan 3000 selling price = $ 129 cost of goods sold =$ 50 and expected salles are 100,000 units

so the profit = sp-cogs*no of units sold 129-50 = $ 79*100,000=$ 7,900,000

reduction in the price = $ 99 cogs = $ 50 no of units sold = 130,000

so profit = $ 99-$ 50=$ 49*130,000= $ 6,370,000

so because of reduction in the selling price from $ 129 to $ 99

the impact on EBIT= $ 7,900,000-$ 6,370,000= $ 1,530,000

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