Question

A firm is able to sell 25,000 units at $ 10 per piece. The company fixed cost is $50,000. Variable cost is $5 per unit.

a.       What is the contribution per unit?

b.      What is the breakeven sales in $? What is the breakeven sale in units?

c.       What is the markup on sales price? What is the mark up on total cost?

They raise the price to $15 and demand drops to 15000.

d. Calculate the price elasticity.

e. What is the new markup (profit margin %) on the sales price ($15)?

f. What is the new mark up (profit margin %) on total cost?

g. Please calculate the total profit for this company as well as the profit per each toy sold.

h. Are they better off raising the price?

Answer 1

a) contribution per unit= sales price per unit- variable cost per unit= 10-5= $5 per unit

b) Break even sales in units= fixed cost/ contribution per unit= 50000/5 = 10000 units

Break even sales in $= 10000*10=$100,000

c) mark up on sales price= (25000*10-50000-25000*5)/(25000*10)=75000/250000= 30%

mark up on cost= 75000/(25000*5+50000)= 43%

Mark up on cost= 5/5=100%

d) Price elasticity=((15000-25000)/(15000+25000))/((15-10)/(15+10))=-1.25

e) New markup on sales= (15*15000-5*15000-50000)/(15000*15)=44.44%

f)new markup on cost= (15*15000-5*15000-50000)/(15000*5+50000)=80%

g) Total profit= (15*15000-5*15000-50000)= $ 100,000

Total profit per unit= 100000/15000= $6.67 per unit

h)Total profit earlier=10*25000-5*25000-50000= $75,000

They are better off as the profit has increased by $ 25,000 by raising the price.