Problem
The management of Company "A" feels that if the price of Product X is decreased from $40 per unit to $36 per unit. unit sales will increase from the current level of 13,000 per year to 20.000 units per year. The variable cost of Product X will decrease from 824 per unit to $20 per unit due to additional discounts offered by suppliers. Unfortunately though, the fixed costs will increase from the current $ 100,000 to $ 170,000, if the sales volume increases.
Management has asked you to analyze this information, [keeping in mind the CVP relationships) and determine the following;
i. How much total additional contribution margin will be created?
ii. Will the changes cause the contribution margin ratio to increase or decrease?