Question

Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75−cent price​ increase, demand is expected to fall by​ 7,000 units. Current Projected Demand 78,000 units 71,000 units Selling price $8.50 $9.25 Incremental cost per unit $5.80 $5.80 Would you recommend the 75−cent price​ increase?

Answer 1

The $0.75 price increase will result in higher profits.

Step-by-step explanation:

Current Demand Projected Demand

Units sold 78,000 units 71,000 units

Selling price $8.50 $9.25

Cost per unit $5.80 $5.80

Contribution margin $2.70 $3.45

Gross profit $210,600 $244,950

The price increase will result in gross profit increasing by $34,350. The decrease in the quantity demanded is offset by a larger increase in the contribution margin per unit.

Answer 2

Flash City Inc is a company manufacturing small flash drives

Current Situation:

Demand = 78,000 Units

Selling price per unit = $8.50

Cost per unit = $5.80

Operating Profit = 78,000 * ($8.50 – $5.80)

Operating Profit = 78,000 * $2.70

Operating Profit = $210,600

Projected Situation:

Demand = 71,000 Units

Selling price per unit = $9.25

Cost per unit = $5.80

Expected Operating Profit = 71,000 * (9.25 – 5.80)

Expected Operating Profit = 71,000 * 3.45

Expected Operating Profit = $244,950

Recommendation: If the selling price price per unit is increase by 0.75 cent, the Operating Profit to realize on manufacturing of the small flash drive will increase by $34,350 ($244,950 - $210,600) although such increment may have an effect of decrease in demand of the Flash drive in market due to increase in price.