Johnson Engineering produces two types of drill bits for the mining industry: a 3/4" model and a 1" model. The manufacturing process takes place in three departments. Tip fabrication makes tungsgten carbide tips out of powdered wolfram. The forging department slots the alloy steel rod and heat treats it for strength. Finally, the assembly department attaches the tips to the rods in a high-temperature brazing process. Information about production during the month of July is provided below.

			3/4 Inch	1 Inch	Total
Production volume (# untis)			250	400
Selling Price			$28.50	$38.50
Direct Material			$8.25	$11.10
Direct Labor			$5.30	$9.65
Manufacturing OH*			$8.40	$11.00
Gross profit

* This included utilities, manufacturing management salaries, quality control, production planning, manufacturing engineering, accounting, property taxes, and other indirect support costs that could not be traced to the individual products. It was generally agreed that these costs did not vary over the volume ranges anticipated in the near future.

Management wants to know how many units must be sold in order to achieve an after tax gross profit of
$8,500	Assume an income tax rate of:		33.0%	The marketing manager says that
the product mix will be 56% 3/4 inch bits and 44% 1 inch bits. (2 points)
			# 3/4" bits	# 1" bits
new product mix			56.0%	44.0%
			# 3/4" bits	# 1" bits
quantities to achieve target after tax profit

The senior management team is considering a price reduction to improve profits. The chief economist for the firm
indicates that the price elasticity of demand for these drill bits is -2.5, i.e., a 10% reduction in price will result in a
25% increase in sales volume. Calculate the resulting change in profitability in $ and % from the baseline shown
above. (4 points)
				dollars	percent
			change in profit
price decrease	10.0%
volume increase	25.0%