Question

Need ASAP, Thank you!

1. This question asks you to do an analysis of a price increase, similar to the analysis discussed in class on October 14 but with different assumptions. For this question, Assume the following …

14. Current price of Product X is $200
15. Current cost to produce Product X is $60
16. Current profit/unit is $140
17. Current unit sales of Product X = 100 units
18. Current Product X profit = $14,000

The Product X Brand Manager proposes to his Chief Financial Officer to increase the price of the product by $20. The CFO says to the Brand Manager … “If you increase the price, the quantity we sell will probably decline because of the downward demand curve that applies to most products. Unfortunately, we don’t know exactly how much unit sales will decline when we increase the price so I’d like to see more information. Please tell me how much of a percentage decline in units sold would allow us to maintain our current profit level of $14,000. Please show me how you did your calculations.”

How would you respond to the CFO if you were Brand Manager for Product X?

Answer 1

Given,

1. Current price of Product X is $200
2. Current cost to produce Product X is $60
3. Current profit/unit is $140
4. Current unit sales of Product X = 100 units
5. Current Product X profit = $14,000
6. If the price of the product is increased by $20, then new price per unit will be $220.

Thus the profit = TR-TC

=P*Q - [C*Q]

=220*Q -60*Q = 160Q

Now, if we still wants to maintain the profit of $14000, then units must be sold = 160Q= 14000

Q= 14000 / 160 = 87.5 units.

Thus, company must sale atleast 87.5 units as below this they will start entertaining profit less than $14000.

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