Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 50

Question

Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350.

Its cost of goods sold for the Hyper 500 is $150 per unit, and this year’s sales are 10,000 units.

Hyperion plans to lower the price to $300 per unit next year and, the company expects this can increase the sales of next year to 15,000 units. If Hyperion were to keep the price at $350, then the company expects the sales would still be 10,000 units for next year. (In both cases, the cost per unit sold would remain at $150 next year.)

The annual depreciation expense is $150,000 and the marginal tax rate is 35%.

A) What is the incremental EBIT of such a price drop for next year?

B) What is the incremental OCF of such a price drop for next year?

Explanation / Answer

Hyperion at 350 at 300 Change Sales 3500000 4500000 VC -1500000 -2250000 Dep. -150000 -150000 EBIT 1850000 2100000 250000 OCF 1352500 1515000 162500

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