Question

In the lecture, based on the beginning balance sheet of our shoe company, we examined the...

In the lecture, based on the beginning balance sheet of our shoe company, we examined the effects on revenue, profits and ROE of a 10% increase in quantity of shoes sold. Now analyze the effects of a 10% increase in price per pair sold (the number of pairs sold is unchanged at 200). Which is better – an increase in sales or the same percentage increase in price? Why?

Homework Answers

Answer #1

Increase in number of shoes sold will increase the total revenue but also will increase the variable cost which are directly related to the production of shoes such as direct labour cost as the number of units will increase, proportionaly the variable cost will also increase.

But on the other hand if we increase the selling price of shoes by 10% then the variable cost will not be affected and will remain the same and hence will give higher profit as compared to 10% increase in number of shoes sold.

Therefore the company should opt for 10% increase in selling price as compared to 10% increase in total number of shoes sold.

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