Pascal Corporation manufactures numerous products, one of which is called Gamma-66. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Pascal decreases the price of Gamma-66 to $48.96, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $51.00? (Your answer should be rounded to the nearest 0.1%.)
A) 4.9%
B) (10.0)%
C) 13.6%
D) (7.6)%

Question

Pascal Corporation manufactures numerous products, one of which is called Gamma-66. The company has provided the following data about this product:  Assume that the total traceable fixed expense does not change. If Pascal decreases the price of Gamma-66 to $48.96, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $51.00? (Your answer should be rounded to the nearest 0.1%.)
A) 4.9% 
B) (10.0)% 
C) 13.6% 
D) (7.6)%

Quizplus · Accepted Answer

To solve this problem, we need to use the contribution margin (CM) ratio, which is calculated as follows:

CM ratio = (Unit selling price - Variable expenses)/Unit selling price

Using the data provided:

CM ratio = ($51 - $35)/$51 = 0.6863

This means that for every dollar of sales revenue, $0.6863 is left over to cover fixed expenses and contribute to profit.

Next, we need to calculate the current level of sales in units:

Current sales in units = Total fixed expenses / CM per unit

Current sales in units = $700,000 / ($51 - $35) = 20,000 units

Now, we can use the CM ratio to find the new sales level required to earn the same net operating income at a lower price of $48.96:

New sales in units = Total fixed expenses / CM per unit at new price

New sales in units = $700,000 / ($48.96 - $35) = 18,489 units

The percentage change in unit sales is therefore:

Percentage change = (New sales - Current sales) / Current sales * 100%

Percentage change = (18,489 - 20,000) / 20,000 * 100% = -7.6%

Therefore, the answer is (D), a decrease of 7.6% in unit sales would be required to maintain the same net operating income at a lower price of $48.96.

Pascal Corporation Manufactures Numerous Products, One of Which Is Called