Swing vs Steady

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Swing vs Steady
a)Swing:
Sales: 5000
Price per unit: $10
Variable Cost per unit: $2.5
Fixed Cost: $35000
Current Profit: $ 2500
New Price per additional unit: 0
New Contribution Margin = New Price per unit – Variable cost per unit =$8.5-$2.5 =$6 New Sales unit @40% additional sales= 5000*40%= 2000
Additional profit @40% additional Sales = Additional Sales* New Contribution Margin =2000*6 =$12000 New Sales unit @20% additional sales= 5000*20%= 1000
Additional profit @20% additional Sales = Additional Sales* New Contribution Margin =1000*6 =$6000

Steady: Sales: 5000
Price per unit: $10
Variable Cost per unit: $5.5
Fixed Cost: $35000
Current Profit: $ 2500
New Price per additional unit: $8.5

New Contribution Margin = New Price per unit – Variable cost per unit =$8.5-$5.5 =$3 New Sales unit @40% additional sales= 5000*40%= 2000
Additional profit @40% additional Sales = Additional Sales* New Contribution Margin =2000*3 =$6000 New Sales unit @20% additional sales= 5000*20%= 1000
Additional profit @20% additional Sales = Additional Sales* New Contribution Margin =1000*3 =$3000

Both the companies should enter the market as they are realizing additional profits by charging a lower price for the new market. b)Swing : ∆P =-1.5
CM= Price- Variable Cost= $10-$2.5 =$7.5
% Break-even sales change= -∆P/(CM + ∆P) = 1.5/(7.5-1.5) = 25% % Break-even sales change in units =5000*25% =1250
Total Break-even sales=5000+1250= 6250
Change in Profit for 40% increase in sales= (Sales change in units- Break-even sales change) * New contribution Margin =(2000-1250)*6 =750*6 =$ 4500 Steady: ∆P =-1.5
CM= Price- Variable Cost= $10-$5.5 =$4.5
New CM= New Price – Variable Cost= 8.5-5.5= 3
% Break-even sales change= -∆P/(CM + ∆P) = 1.5/(4.5-1.5) = 50% % Break-even sales change in units =5000*50% =2500
Total Break-even sales=5000+2500= 7500
Change in Profit for 40% increase in sales= (Sales change in units- Break-even sales...
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