Question

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $5.00 and 2,240 cones were sold. During the second week, she priced the cones at $5.50 and 1,800 cones were sold. The variable cost of a cone is $1.10 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,035 per week.

Required:

1. What profit did Maria earn during the first week when her price was $5.00?

2. At the start of the second week, Maria increased her selling price by what percentage? What percentage did unit sales decrease? (Round your percentage answers to 2 decimal place.)

3. What profit did Maria earn during the second week when her price was $5.50?

4. What was Maria's increase (decrease) in profits from the first week to the second week?

Answer 1

1. Profit earned during the first week: $6701

Sales	11200
Variable costs	2464
Fixed costs	2035
Profit	6701

2. Percentage increase in selling price = ($5.50 - $5.00)/$5.00 = $0.50/$5.00 = 10%

Percentage decrease in unit sales = (2240 - 1800)/2240 = 440/2240 = 19.64%

3. Profit earned during the second week: $5885

Sales	9900
Variable costs	1980
Fixed costs	2035
Profit	5885

4. Decrease in profits from the first week to the second week = $6701 - $5885 = $816