Question

Ingham Corporation recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. Selling Price Unit Sales $77.00 2,900 $69.00 3,640 The product's variable cost is $13.80 per unit. According to the formula in the text, the product's profit-maximizing price is closest to: (Do not round the intermediate calculations.) 11.29 23.68 26.68 23.18

Answer 1

Correct answer is:$26.68
Workings:
Selling Price	Unit sales
$ 77	2,900
$ 69	3,640
Variable cost	=	$   13.80
Change in Selling Price	=	($69 - $77) / $77
	=	-10.39%
Change in Sales units	=	(3,640 - 2,900) / 2,900
	=	25.52%
Elasticity of Demand	=	[ln(1+Change in Sales units)]/[ln(1+Change in Selling Price)]
	=	[ln(1+25.52%)]/[ln(1+(-10.39%))]
	=	-2.07191
Profit maximizing markup on Variable cost	=	-1 / (1+ Elasticity of Demand)
	=	-1 / (1+ (-2.07191))
	=	0.93292
Profit maximizing price	=	(1+Profit maximizing markup on Variable cost) X Variable cost
	=	(1+0.93292) X $13.80
	=	$   26.67