Question:
KK, an aspiring entrepreneur wanted to set up a pen drive manufacturing unit. Since technology was changing very fast, he wanted to carefully gauge the demand and the likely profits before investing. Market survey indicated that he would be able to sell 1 lac units before customers shifted to different gadgets. KK realized that he had to incur two kinds of costs: fixed costs (the costs which do not change, irrespective of the number of units of pen drives produced) and variable costs (= variable cost per unit multiplied by the number of units). KK expected the fixed cost to be Rs. 40 lac and the variable cost to be Rs. 100 per unit. He expected each pen drive to be sold at Rs. 200.
KK was skeptical that the variable cost per unit might increase by 10 percent, though the demand might remain the same. What will be the expected change in profit in such a case?
KK, an aspiring entrepreneur wanted to set up a pen drive manufacturing unit. Since technology was changing very fast, he wanted to carefully gauge the demand and the likely profits before investing. Market survey indicated that he would be able to sell 1 lac units before customers shifted to different gadgets. KK realized that he had to incur two kinds of costs: fixed costs (the costs which do not change, irrespective of the number of units of pen drives produced) and variable costs (= variable cost per unit multiplied by the number of units). KK expected the fixed cost to be Rs. 40 lac and the variable cost to be Rs. 100 per unit. He expected each pen drive to be sold at Rs. 200.
KK was skeptical that the variable cost per unit might increase by 10 percent, though the demand might remain the same. What will be the expected change in profit in such a case?
KK was skeptical that the variable cost per unit might increase by 10 percent, though the demand might remain the same. What will be the expected change in profit in such a case?
Show Hint
Only the variable cost changes here; find the extra total variable cost from the 10 percent hike and compare it to the original profit to get the percentage fall.
Updated On: Jul 10, 2026
- Profit would decrease by 10.33%
- Profit will increase by 15.75%
- Profit would decrease by 15.75%
- Profit will decrease by 16.67%
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The Correct Option is D
Solution and Explanation
Step 1: Work out the original profit at the expected demand of 1 lac units.
Revenue = \(1,00,000 \times 200 = 2,00,00,000\).
Total cost = fixed cost + variable cost = \(40,00,000 + (100 \times 1,00,000) = 40,00,000 + 1,00,00,000 = 1,40,00,000\).
Original profit = \(2,00,00,000 - 1,40,00,000 = 60,00,000\).
Step 2: Work out the new variable cost per unit.
A 10 percent increase on Rs. 100 gives \(100 \times 1.10 = 110\) per unit.
Step 3: Work out the new total cost and profit, keeping demand at 1 lac units.
New variable cost = \(110 \times 1,00,000 = 1,10,00,000\).
New total cost = \(40,00,000 + 1,10,00,000 = 1,50,00,000\).
Revenue is unchanged since demand is the same, so new profit = \(2,00,00,000 - 1,50,00,000 = 50,00,000\).
Step 4: Find the percentage change in profit.
\[ \text{Change} = \frac{50,00,000 - 60,00,000}{60,00,000} \times 100 = \frac{-10,00,000}{60,00,000} \times 100 = -16.67\% \] The negative sign shows profit falls, and it falls by 16.67 percent, not by 10.33 percent or 15.75 percent, which would come from comparing the change to the wrong base or the wrong cost figure.
Final Answer:
\[ \boxed{\text{Profit decreases by } 16.67\%} \]
Revenue = \(1,00,000 \times 200 = 2,00,00,000\).
Total cost = fixed cost + variable cost = \(40,00,000 + (100 \times 1,00,000) = 40,00,000 + 1,00,00,000 = 1,40,00,000\).
Original profit = \(2,00,00,000 - 1,40,00,000 = 60,00,000\).
Step 2: Work out the new variable cost per unit.
A 10 percent increase on Rs. 100 gives \(100 \times 1.10 = 110\) per unit.
Step 3: Work out the new total cost and profit, keeping demand at 1 lac units.
New variable cost = \(110 \times 1,00,000 = 1,10,00,000\).
New total cost = \(40,00,000 + 1,10,00,000 = 1,50,00,000\).
Revenue is unchanged since demand is the same, so new profit = \(2,00,00,000 - 1,50,00,000 = 50,00,000\).
Step 4: Find the percentage change in profit.
\[ \text{Change} = \frac{50,00,000 - 60,00,000}{60,00,000} \times 100 = \frac{-10,00,000}{60,00,000} \times 100 = -16.67\% \] The negative sign shows profit falls, and it falls by 16.67 percent, not by 10.33 percent or 15.75 percent, which would come from comparing the change to the wrong base or the wrong cost figure.
Final Answer:
\[ \boxed{\text{Profit decreases by } 16.67\%} \]
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