The accountants at French Perfumery decided to increase the price of a scent called Breezy by 10%, from $6.00 per bottle to $6.60. French’s accountants expect the 10% price increase to reduce unit sales by 20%. Current sales are 200,000 bottles, and total variable costs are $800,000.

REQUIRED

A. Estimate the pretax profit effect of the price change, assuming no effect on the variable cost rate, on total fixed costs, or on sales of other products.

B. How certain can the accountant be that volume will decline 20% if the selling price increases to $6.60? What effect does this uncertainty have on the managers’ decision to increase the selling price?