Chapter 5
Chapter 5
Chapter 5
1. Eastern Semiconductor is currently selling its most popular microchip for $220. It
has been selling 4,000 of these chips per month. The company has learned, however,
that next month an overseas competitor will enter the market and start selling a copy
of this chip for $200. If Eastern maintains its price of $220 per chip, it expects its
sales to decrease to 3,000 units per month.
a. Given that Eastern’s variable costs for this product are $40 per chip, what is the
breakeven sales level for Eastern decreasing its price by $20 price per chip?
b. Do you think it is likely that Eastern will achieve this breakeven sales level?
That Eastern will achieve this breakeven sales level because this breakeven
computation indicates that his sales level would have to increase by more than 5000
chips per month before his profits would start to increase.
2. Plasiderm, Inc., sells a medical product. The company is currently selling the
product for $18/unit and is considering whether it could increase profits by increasing
the product’s price to $20/unit. Plasiderm currently sells 50,000 units per week. Its
current weekly operating data are as follows:
You can assume that per-unit variable costs do not vary with the level of production.
a. What is the breakeven sales level for the price increase that Plasiderm is
considering? Explain what this breakeven sales level means.
P0 = $18
P1 = $20
Contribution margin per unit = Selling price per unit - Variable cost per unit
= 20 - 8 = $2
= 0 - ( 2 × 50000 ) / ( 20 - 18)
= ( -100000) / 2
= -50000
b. If the sales level for this product decreased by 5,000 units per week after the price
increase, what would be the change in Plasiderm’s weekly pretax profits caused by
the price increase?
c. What would be Plasiderm’s profit change if, after the price increase, sales remained
at 50,000 units per week?
a. What is the per-gallon cost that is relevant for pricing decisions concerning heating
oil that the retailer will sell today? Explain your answer.
b. If the heating oil retailer is planning to respond to the wholesale price decrease by
lowering his $3.25-per-gallon retail price, should he wait 30 days to make that price
change? Explain youranswer