Question

The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The postal service purchases the souvenir sheets from a supplier for $1.80 each. St. Vincent has been selling the souvenir sheets for $14.00 each and ordinarily sells about 100,000 units. To test the market, the postal service recently priced a new souvenir sheet at $12.60 and sales increased to 114,000 units.

4. What was the postal service’s increase (decrease) in total contribution margin going from the higher price of $14.00 to the lower price of $12.60?

5. How many sheets would the postal service have to sell at the lower price of $12.60 to equal the total contribution margin earned at the higher price of $14.00? (Round your answer to the nearest whole number.)

6. What percentage increase in the number of sheets sold at $12.60 must be achieved to equal the total contribution margin earned at the higher price of $14.00?

Answer 1

Answer 4:

Contribution per unit = Selling price per unit (-) variable cost per unit

Contribution per unit at higher price = 14 (-) 1.8 = $ 12.2 per unit

Total contribution at higher price = 12.2 * 1,00, 000 = $12,20,000

Contribution at lower price = 12.6 - 1.8 = $ 10.8 per unit

Total contribution at higher price = 10.8 * 1,14, 000 = $12,31,200

Increase in total contribution = $ 11200

Answer 5:

Number of units to be sold = Desired total contribution / contribution per unit

= 12,20,0000/ 10.8

= 1,12,963 units

Answer 6:

Inrease in number of sheets = units to be sold at lower price (- ) units sold at higher price

= 1,12,963 - 1,00,000

= 12,963 units

% increase in number of sheets = 12963 *100/ 100000

= 12.963%