During 2016,Seth Britain Lab supplied hospitals with a comprehensive diagnostic kit for $120.At a volume of 80,000 kits,Seth had fixed costs of $1,000,000 and a profit before income taxes of $200,000.Due to an adverse legal decision,Seth's 2017 liability insurance increased by $1,200,000 over 2016.Assuming the volume and other costs are unchanged,what should the 2017 price be if Seth is to make the same $200,000 profit before income taxes? (CPA adapted)
A) $122.50.
B) $135.00.
C) $152.50.
D) $240.00.

Question

Quizplus · Accepted Answer

The total cost for Seth Britain Lab in 2016 can be calculated as follows:

Total Costs = Fixed Costs + Variable Costs
Variable Costs = 80,000 kits x $120 per kit = $9,600,000
Total Costs = $10,600,000

The profit before income taxes in 2016 was $200,000, therefore:

Revenue 2016 = Total Costs + Profit before Taxes = $10,800,000

To maintain the same profit of $200,000 in 2017, Seth needs to calculate the new selling price per diagnostic kit:

Revenue 2017 = Total Costs 2017 + Profit before Taxes 2017

Profit before Taxes 2017 = Profit before Taxes 2016

Total Costs 2017 = Fixed Costs 2017 + Variable Costs 2017
Fixed Costs 2017 increased by $1,200,000

Variable Costs 2017 remain the same as in 2016

Total Costs 2017 = $2,200,000 + $9,600,000 = $11,800,000

Revenue 2017 = $11,800,000 + $200,000 = $12,000,000

New Selling price per diagnostic kit in 2017= $12,000,000 / 80,000 kits = $150 per kit

Therefore, the correct answer is D) $240.00.

During 2016,Seth Britain Lab Supplied Hospitals with a Comprehensive Diagnostic