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 $6.60 and 2,680 cones were sold. During the second week, she priced the cones at $7.10 and 2,200 cones were sold. The variable cost of a cone is $1.90 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,075 per week. Required: 1. What profit did Maria earn during the first week when her price was $6.60? 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 $7.10? 4. What was Maria's increase (decrease) in profits from the first week to the second week?

Answer 1

1)

Sales (2,680*6.6)	17,688
Less: Variable cost (2,680*1.9)	5,092
Contribution margin	12,596
Less: Fixed cost	2,075
Profit	10,521

2)

	First week	Second week	Change
Units	2,680	2,200	480
Sale price	6.6	7.1	0.5

i) Increase selling price = 0.5/6.6*100 = 7.57%

ii) Decrease in units = 480/2,680*100 = 17.91%

3)

Sales (2,200*7.1)	15,620
Less: Variable cost (2,200*1.9)	4,180,
Contribution Margin	11,440
Less: Fixed cost	2,075
Net profit	9,365

4)

Net profit (first week)	10,521
(second week)	9,365
Decrease	1,156

% of decrease = 1,156/10,521*100

= 10.99%