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28 February, 10:56

Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit. Currently Projected Demand 50,000 units 62,500 units Selling price $60 $57 Variable costs per unit $52 $50 Would you recommend the $3 price decrease?

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  1. 28 February, 11:34
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    Yes decrease in price is recommended.

    Explanation:

    In the given case the decision will be based on contribution margin.

    Contribution margin = Sales - Variable Costs

    Contribution margin in case of original sales will be

    Sales = 50,000 units X $60 = $3,000,000

    Less: Variable Cost = 50,000 X $52 = $2,600,000

    Contribution Margin = $3,000,000 - $2,600,000 = $400,000

    Contribution Margin In case of Decrease in Price

    Sales = 62,500 units X $57 = $3,562,500

    Less: Variable Cost = 62,500 X $50 = $3,125,000

    Contribution Margin = $3,562,500 - $3,125,000 = $437,500

    Since contribution margin has increased price shall be decreased.

    Thus it is recommended to decrease the price.
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