Question

Clulow 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 $34.00 7,800 $31.00 10,010 The product's variable cost is $10.50 per unit. The product's profit-maximizing price according to the formula in the text is closest to:

$15.31

$16.67

$20.79

$13.86

Answer 1

Before

Price = 34

Quantity = 7800

Total sales = 7800 × 34 = 265200

Variable cost = 10.50 / unit

Therefore contribution margin = 265200 - (7800 × 10.50)

= 183300

After

Price = 31

Quantity = 10010

Total sales = 31 × 10010 = 310310

Contribution margin = 310310 - (10010 × 10.50)

= 205205

Product's profit maximising price

Difference in contribution margin = 205205 - 183300 = 21905

Difference in units = 10010 - 7800 = 2210

Therefore 21905 ÷ 2210 = 9.9117

Price = 9.9117 + 10.50 = 20.4117

Therefore closest price = 20.79