A leather goods retailer has been buying a popular style of handbag for $12 per bag and selling them for $20 per bag. The retailer has been selling 200 handbags per month. The retailer has been close to bankruptcy for the past year. In response to this threat, the retailer’s buyer has found an overseas source for this handbag. The new source results in the cost per handbag decreasing to $10 per bag, and the new shipments will begin arriving on January 1. The shop’s owner feels that the arrival of the new versions of the popular handbag might present a good occasion to carry out a $2 price increase.
(a) What is the change in the retailer’s variable costs that will occur on January 1? Is this change independent of the price change that the shop’s owner is considering or is it tied to this prospective price change? Explain.
(b) Calculate the breakeven sales level for the price increase that the shop’s owner is considering, and justify your answer.