Profit Impact from Price Cut and Sales Volume Increase

Steps:

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

Why A is correct:

• Matches the net change in total contribution ($162,500 new -$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 $30 instead of$25, yielding $4500 gain.
• D: Overestimates by assuming unchanged contribution margin post-price cut.

Final answer: A