Use the information for the question(s) below.
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.
-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.Also suppose that for each Glucoscan monitor sold,GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%.Considering the increase in the sale of testing strips,the incremental impact of this price drop on the firms EBIT is closest to:
A) A decline of 1.5 million
B) A decline of 0.7 million
C) An increase of 0.7 million
D) An increase of 1.5 million

Question

Quizplus · Accepted Answer

C) Without Price Cut
Monitor sales = 100,000 × ($129 - $50) = $7,900,000
Strip sales = 100,000 × ($100 - $25) = $7,500,000
Total EBIT = 7,900,000 + 7,500,000 = 15,400,000
With Price Cut
Monitor sales = 130,000 × ($99 - $50) = $6,370.000
Strip sales = 130,000 × ($100 - $25) = $9,750,000
Total EBIT = 6,370,000 + 9,750,000 = 16,120,000
Incremental = 16,120,000 - 15,400,000 = 720,000

Use the Information for the Question(s) Below