To answer this, we need to work out a revised budgeted revenue figure and compare it with the original budgeted revenue as given in the problem. The difference is the answer, as follows: Product Quantity Price Revenue 1 (200,000 × .80) ($50 × 1.1) $8,800,000 2 (150,000 × .80) $10 1,200,000 3 (300,000 × 1.05) $30 9,450,000 $19,450,000 Original Revenue: 20,500,000 Decrease: $1,050,000
This answer results from reducing Product 1's quantity by 10% instead of 20% and from not changing the price for Product 1.
This answer results from not calculating the reduced sales of Product 2. The problem states that Product 2 is a complement of Product 1, and that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Therefore, if the quantity sold of Product 1 decreases, the quantity sold of Product 2 will decrease by a proportionately equal amount.
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Item 2 is a complement to Item 1. Past experience indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering a 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales revenue will decrease by