Northport Company manufactures numerous products, one of which is called Sea Bre

ID: 3195925 • Letter: N

Question

Northport Company manufactures numerous products, one of which is called Sea Breeze Skin Cleanser. The company has provided the following data regarding this product:

Management is considering increasing the price of Sea Breeze by 20%, from $20.00 to $24.00. The company’s marketing managers estimate that this price hike could decrease unit sales by as much as 30%, from 120,000 units to 84,000 units.

Required:

In all of the below requirements, assume that the traceable fixed expenses are not affected by the pricing decision.

1. Assuming the marketing managers’ estimate is accurate, what profit will Sea Breeze Skin Cleanser earn at a price of $24.00?

2. How many units would Northport need to sell at a price of $24.00 to earn the exact same profit that it currently earns at a price of $20.00? (Round your answer to the nearest whole number.)

3. If Northport raises the price of Sea Breeze Skin Cleanser to $24.00, what percentage decrease in unit sales could be absorbed while still providing the same profit currently being earned at a price of $20.00? (Round your intermediate calculations to the nearest whole number. Round final answer to 1 decimal place.)

Unit sales (a) 120,000 Selling price per unit $ 20.00 Variable cost per unit 13.00 Contribution margin per unit (b) $ 7.00 Total contribution margin (a) × (b) $ 840,000 Traceable fixed expenses 800,000 Net operating income $ 40,000

Explanation / Answer

Variable cost per unit = 13$

Selling price per unit = 24$

Unit sales = 84000 units

Therefore Contribution margin per unit= Selling price per unit - Variable cost per unit = 24$ - 13$ = 11$

Total contribution margin= Contribution margin per unit * Unit sales = 11*84,000= 924,000$

Net operating income = 924,000$ - 800,000$ = 124,000$

Let number of units be x for the same.

Total contribution margin= Contribution margin per unit * Unit sales = 11x

Net operating income = 11x - 800,000$

Given Net operating income1 = Net operating income2

11x - 800,000$ = 40000$

11x = 840000$

x= 76363.63 = 76364