Budgeting

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bsimmons

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Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year 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.

1. Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. The incremental impact of this price drop on the firm’s EBIT is closest to:
For my answer I got .30* 130000*50=1,950,000
I would like to verify the answer. Am I in the ballpark or out in the field?
 
bsimmons said:
Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year 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.

1. Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. The incremental impact of this price drop on the firm’s EBIT is closest to:
For my answer I got .30* 130000*50=1,950,000 ? How did you get this formula?

Remember

EBIT = Revenue - Operating Expenses

What was the earning before price drop?

What was the earning after price drop?

Did the earning grow or shrink?

I would like to verify the answer. Am I in the ballpark or out in the field?
Click to expand...
 
It's this simple:
Leave price same: 100,000 @ (129 - 50)
Decrease price: 130,000 @ (99 - 50)
 
Okay Denis, Now I understand..........I don't know why i didn't see that. I guess i just wasn't thinking.
 
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