CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
Firm X has sales of 800 million and a cost of goods sold of 520 million. It is a cost leader and expects a price war to cut its average selling price by 5% with no change in unit volume or unit cost. The firm's gross profit after the price cut is closest to:
Gross profit after the price cut is closest to 240 million. Sales fall 5% to 760 million while cost of goods sold stays at 520 million, so gross profit drops from 280 million to 240 million, showing how price cuts hit margins when unit cost is unchanged.
- A240 millionCorrect
- B280 million
- C320 million
Explanation
Sales after a 5% price cut are 800 × 0.95 = 760 million. Costs are unchanged at 520 million, so gross profit is 760 − 520 = 240 million. The 280 million figure is the original gross profit (800 − 520), ignoring the cut. The 320 million figure results from wrongly subtracting 5% of cost.
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