Smith Industries currently sells an energy efficient refrigerator with a water filter, the "Greene" for $700. As SI is about to come out with a new model in 2016, they are planning to lower the selling price to $590. The current cost of goods sold for the Greene is $285. At the current price point, 18,000 unit sales are expected.
a. If SI decided today to reduce the price, sales are projected to increase by 50%. What would be the incremental impact on this year's EBIT of such a price drop?
b. With each refrigerator, SI expects an additional $55 in water filter sales. As their water filter plant has just become automated, they are able to operate at a gross profit margin of 85% on each filter. What is the incremental impact on EBIT for the water filter sales?