LeBlanc Lighting manufactures small flashlights and is considering raising the price by 50 cents a
unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000
units.
Currently Projected
Demand 20,000 units 17,000 units
Selling price $4.50 $5.00
Incremental cost per unit $3.00 $3.00
1. If the price increase is implemented, operating profit is projected to
a. increase by $4,000.
b. decrease by $4,000.
c. increase by $6,000.
d. decrease by $4,500.
Answer: a
[17,000 x ($5 - $3)] – [20,000 x ($4.50 - $3.00)] = increase of $4,000
2. Would you recommend the 50-cent price increase?
a. No, because demand decreased.
b. No, because the selling price increases.
c Yes, because contribution margin per unit increases.
d. Yes, because operating profits increase.
Answer: d