Question
A company is currently selling 10,000 units per month of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will Blank______.
Multiple choice question.
increase by $24,000
increase by $74,000
increase by $3,750
decrease by $29,750
Multiple choice question.
increase by $24,000
increase by $74,000
increase by $3,750
decrease by $29,750
Answers
GPT-4o mini
To determine how the profits will change if the advertising strategy is implemented, we need to break down the calculations step by step.
1. **Current Situation**:
- Current sales = 10,000 units
- Current price per unit = $40
- Current contribution margin per unit = $27
- Current total contribution margin = Current sales * Contribution margin per unit = 10,000 * $27 = $270,000
2. **New Situation After Advertising**:
- Increment in sales = 750 units
- New sales volume = 10,000 + 750 = 10,750 units
- New selling price = $45
- New contribution margin = Selling price - Variable cost
- Given that the contribution margin from the current situation is $27, the variable cost per unit can be calculated as follows:
- Current Selling Price ($40) - Current Contribution Margin ($27) = Variable Cost ($13)
- New Contribution Margin = New Price ($45) - Variable Cost ($13) = $32
3. **Calculate the New Total Contribution Margin**:
- New total contribution margin = New sales volume * New contribution margin per unit
- New total contribution margin = 10,750 * $32 = $344,000
4. **Calculate the Increase in Total Contribution Margin**:
- Increase in total contribution margin = New total contribution margin - Current total contribution margin
- Increase = $344,000 - $270,000 = $74,000
5. **Subtract Advertising Costs**:
- Net increase in profit = Increase in total contribution margin - Advertising costs
- Net increase in profit = $74,000 - $50,000 = $24,000
Thus, if the change is implemented, profits will **increase by $24,000**.
The correct answer is:
**increase by $24,000**.
1. **Current Situation**:
- Current sales = 10,000 units
- Current price per unit = $40
- Current contribution margin per unit = $27
- Current total contribution margin = Current sales * Contribution margin per unit = 10,000 * $27 = $270,000
2. **New Situation After Advertising**:
- Increment in sales = 750 units
- New sales volume = 10,000 + 750 = 10,750 units
- New selling price = $45
- New contribution margin = Selling price - Variable cost
- Given that the contribution margin from the current situation is $27, the variable cost per unit can be calculated as follows:
- Current Selling Price ($40) - Current Contribution Margin ($27) = Variable Cost ($13)
- New Contribution Margin = New Price ($45) - Variable Cost ($13) = $32
3. **Calculate the New Total Contribution Margin**:
- New total contribution margin = New sales volume * New contribution margin per unit
- New total contribution margin = 10,750 * $32 = $344,000
4. **Calculate the Increase in Total Contribution Margin**:
- Increase in total contribution margin = New total contribution margin - Current total contribution margin
- Increase = $344,000 - $270,000 = $74,000
5. **Subtract Advertising Costs**:
- Net increase in profit = Increase in total contribution margin - Advertising costs
- Net increase in profit = $74,000 - $50,000 = $24,000
Thus, if the change is implemented, profits will **increase by $24,000**.
The correct answer is:
**increase by $24,000**.