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NEW QUESTION: 1
Musgrave Corporation has fixed costs of $46,000 and variable costs that are 30 percent of the current sales price of $2.15. At a price of $2.15, Musgrave sells 40,000 units. Musgrave can increase sales by
10,000 units by cutting its unit price from $2.15 to $1.95, but variable cost per unit won't change. Should it cut its price?
A. Yes, EBIT increases by $5,050.
B. Yes, EBIT increases by $11,500.
C. Yes, EBIT increases by $8,050.
D. No, EBIT decreases by $6,000.
E. No, EBIT decreases by $250.
Calculate EBIT(1) at 40,000 units using the current sales price:
EBIT(1) = S - VC - FC = 40,000($2.15) - 0.30(40,000)($2.15) - $46,000 = $86,000 - $25,800 - $46,000
Calculate EBIT(2) at 50,000 units using the lower price of $1.95:
EBIT(2) = 50,000($1.95) - 0.30(50,000)($1.95) - $46,000 = $97,500 - $29,250 - $46,000 = $22,250.
The change in EBIT = $22,250 - $14,200 = +$8,050.
Yes, Musgrave should cut its price, EBIT increases by $8,050.
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