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A retailer wants to put items on sale and wants to know the impact on profit if the selling price of those items are reduced by 25%
A retailer wants to put items on sale and wants to know the impact on profit if the selling price of those items are reduced by 25%. To assist the retailer, provide a detailed example of CVP analysis using the original sales price and then do a "what if“ analysis if the retailer sold 100 more items at the lower price. Do you think your analysis would show the same impact on profit for both the company’s online and brick and mortar stores keeping in mind the idea of variable and fixed costs? Why or why not?
Expert Solution
CVP ( cost volume profit) Analysis :
Cost Volume Profii Analysis is used to determine how changes in cost and volume affect a company' s operating income and net income.
In this analysis, identifies the relationship between three terms Viz cost, volume and the profit.
Assumptions :
1. All costs can be separated in to fixed and variable.
2. Total fixed cost doesn't change irrespective of volume range
3. Per unit selling Price and unit variable cost doesn't change.
In this scenario , if the selling price is reduced to 25% then profit value is reduced to 25%. And also the retailer sold 100 more items at lower prices , fixed cost doesn't change, if the volume of the item increases and the reduces the selling price , profit will be reduced, and the variable cost will change .
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