CIMA BA2 · Chapter 10 · Question 11 of 12
A product currently sells 30,000 units a period at $20 each. Variable cost is $12 per unit and fixed costs are $150,000. The sales manager proposes cutting the price to $18, which is expected to increase sales volume by 25%. What would be the effect on profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Profit would fall by $15,000
Explanation
Current profit = 30,000 x ($20 - $12) - $150,000 = $90,000. New volume = 30,000 x 1.25 = 37,500 units; new contribution per unit = $18 - $12 = $6. New profit = 37,500 x $6 - $150,000 = $225,000 - $150,000 = $75,000. Profit falls by $15,000.
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