Question

3. Currently, you sell 40,000 units of a product for $45 each. The unit variable cost of producing the product is $5. You are thinking of cutting the product price by 30 percent. You are sure this will increase sales by an amount from 10 percent to 50 percent. Perform a sensitivity analysis to show how profit will change as a function of the percentage increase in sales. Ignore fixed costs.

Answer 1

New price = $45 x 70% = $31.5

Let new quantity be Q.

Profit = Q x (Selling price - Unit variable cost) = Q x (31.5 - 5) = Q x $26.5

Let us consider change in Q in intervals of 10%.

The sensitivity analysis is as follows.

	(Original Q)	(Q: Increase 10%)	(Q: Increase 20%)	(Q: Increase 30%)	(Q: Increase 40%)	(Q: Increase 50%)
	Q = 40,000	Q = 44,000	Q = 48,000	Q = 52,000	Q = 56,000	Q = 60,000
Profit ($)	10,60,000	11,66,000	12,72,000	13,78,000	14,84,000	15,90,000

answered by: anonymous