Complete Question:
Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI is considering lowering the sale price 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. The marginal corporate tax rate is 40%. Suppose that if GSI drops the price on the Glucoscan 3000 to $99 immediately, it can increase sales over the next year by 30% to 130,000 units.
Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. These strip sales occur on all monitor sales regardless of the price of the monitor. Including the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to:
Answer:
$720,000
Step-by-step explanation:
Incremental Earnings Before Interest and Tax Analysis
Details Current price Reduced price
Units Sold 100,000 130,000
Unit sales price 129 99
Sales Revenue $12,900,000 $12,870,000
Cost of Goods sold at $50 5,000,000 $6,500,000
Gross Profit $7,900,000 $6,370,000
G. Profit on Strips sold at $75 $7,500,000 $9,750,000
Total Gross Profit for the year $15,400,000 $16,120,000
The Net benefit of this price change is increase of Earnings before interest and tax by $720,000.