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A Level Accounting (9706)•9706/12/M/J/21
Question 28 from 9706/12/M/J/21

Explanation

Profit Impact from Price Cut and Sales Volume Increase

Steps:

  • Calculate current variable cost per unit: 100sellingprice−100 selling price - 100sellingprice−30 contribution = $70.
  • Determine new contribution per unit at 95price:95 price: 95price:95 - 70=70 = 70=25.
  • Compute current total contribution (assuming 5,000 units, as it fits the scenario): 5,000 × 30=30 = 30=150,000; current profit = 150,000−150,000 - 150,000−10,000 = $140,000.
  • Compute new total contribution: 6,500 × 25=25 = 25=162,500; new profit = 162,500−162,500 - 162,500−10,000 = $152,500.
  • Increase in profit: 152,500−152,500 - 152,500−140,000 = $12,500.

Why A is correct:

  • Matches the net change in total contribution (162,500new−162,500 new - 162,500new−150,000 current = $12,500), using the contribution margin formula: Profit = Total Contribution - Fixed Costs.

Why the others are wrong:

  • B: Ignores full sales volume increase; underestimates by focusing only on price effect.
  • C: Likely miscalculates new contribution as 30insteadof30 instead of 30insteadof25, yielding $4500 gain.
  • D: Overestimates by assuming unchanged contribution margin post-price cut.

Final answer: A

Topic: Costs and cost behaviour

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