Hyperion Inc. currently sells its latest high-speed color printer the Hyper 500 for $350. It

QUESTION

Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this years sales are expected to be 20,000 units. a. Suppose that if Hyperion drops the price to $300 immediately, it can increase this years sales by 25% to 25,000 units. What would be the incremental impact on this years EBIT of such a price drop? b. Suppose that for each printer sold, Hyperion expects additional sales of $75 per year on ink cartridges for the next three years, and Hyperion has a gross profit margin of 70% on ink cartridges. What is the incremental impact on EBIT for the next three years of a price drop this year?
Answer A Planned Situation Units Price Total Sales 25,000 $ 300 $ 7,500,000 Cost of goods sold 25,000 $ 200 $ 5,000,000 Gross Profit $ 2,500,000 Current Situtation Units Price Total Sales 20,000 $ 350 $ 7,000,000 Gross Profit 20,000 $ 200 $ 4,000,000 Gross Profit $ 3,000,000 Change in EBIT $ (500,000) ($ 2,500,000 less $ 3,000,000) Answer B Planned Situation Units Price Total Sales 25,000 $ 75 $ 1,875,000 Gross Profit Margin $

1,312,500 (70% of Sales) Current Situtation Units Price Total Sales 20,000 $ 75 $ 1,500,000 Gross Profit Margin $ 1,050,000 (70% of Sales) Change in Gross Profit Margin $ 262,500 Incremental Change in EBIT Year 1 $ (237,500) ($ 262,500 less $ 500,000) Year 2 $ 262,500 Year 3 $ 262,500

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION