Question

Quick Change and Fast Change are competing oil change businesses. Both companies have 4,700 customers. The price of an oil change at both companies is $15. Quick Change pays its employees on a salary basis, and its salary expense is $47,000. Fast Change pays its employees $10 per customer served. Suppose Quick Change is able to lure 1,000 customers from Fast Change by lowering its price to $13 per vehicle. Thus, Quick Change will have 5,700 customers and Fast Change will have only 3,700 customers. Select the correct statement from the following.A. Quick Change's profit will increase while Fast Change's profit will fall. B. Profits will decline for both Quick Change and Fast Change. C. Fast Change's profit will stay the same but it will still earn a higher profit than Quick Change.D. Quick Change's profit will remain the same while Fast Change's profit will decrease.

Answer 1

Answer:

A. Quick Change's profit will increase while Fast Change's profit will fall.

Explanation:

Initially, both Quick Change and Fast Change have 4700 customers and the revenue per customer is $15. The total revenue for both businesses is,

• 15 * 4700 = 70500

The salary expense of Quick change is fixed at 47000. Thus, Quick Change's profit, initially, is:

• 70500 - 47000 = 23500

The Salary expense of Fast Change is variable as it is calculated on the number of customers served at $10 per customer. So, Fast Change's initial profit is,

• 70500 - (10 * 4700) = 23500

When the number of customers change and Quick change gains 1000 more customers and reduced its price to 13, the new revenue and profit for Quick change will be,

• Revenue = 13 * 5700 = 74100
• The salaries expense is fixed so it will stay 47000
• Profit = 74100 - 47000 = 27100
• Thus the profit of Quick Change will increase to 27100 from 23500.

The new revenue and profit of Fast Change will be,

• Revenue = 15 * 3700 = 55500
• The new salary expense will be = 10 * 3700 = 37000
• The new profit will be = 55500 - 37000 = 18500

So Quick Change's profit has increased while Fast Change's profit has fallen.