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Answer :
1. The profit on 70,000 units with the advertising and selling price increase is 181,000 p
2. The price Corrientes would have to charge is at least 5.00 p per unit on the special order to earn an additional profit of 30,000 p.
How to calculate profit
Without the advertising and selling price increase, the contribution margin per unit is:
Selling price per unit - Variable cost per unit
= 5.40 p - 3.00 p
= 2.40 p
With 70,000 units sold, the total contribution margin is:
Contribution margin per unit x Number of units sold
= 2.40 p x 70,000
= 168,000 p
The fixed costs are 54,000 p, so the operating profit without the advertising and selling price increase is:
Operating profit = Total contribution margin - Fixed costs
= 168,000 p - 54,000 p
= 114,000 p
With the advertising and selling price increase, the new contribution margin per unit is:
Selling price per unit - Variable cost per unit
= 6.40 p - 3.00 p
= 3.40 p
With 70,000 units sold, the total contribution margin is:
Contribution margin per unit x Number of units sold
= 3.40 p x 70,000
= 238,000 p
The fixed costs are still 54,000 p, so the operating profit with the advertising and selling price increase is:
Operating profit = Total contribution margin - Fixed costs - Additional advertising cost
= 238,000 p - 54,000 p - 3,000 p
= 181,000 p
Thus, the profit on 70,000 units with the advertising and selling price increase is 181,000 p.
The contribution margin per unit on the special one-time purchase of 15,000 units needs to be at least:
Desired profit / Number of units sold
= 30,000 p / 15,000 units
= 2 p per unit
The variable cost per unit is 3.00 p, so the minimum price per unit that Corrientes can charge is:
Variable cost per unit + Desired contribution margin per unit
= 3.00 p + 2.00 p
= 5.00 p
Therefore, Corrientes would need to charge at least 5.00 p per unit on the special order to earn an additional profit of 30,000 p.
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