Question

Betty Dowers (BD) supplies Famous Clothing (FC), a specialty boutique store in the Coral Ridge Mall, with fleece sweaters at $27 per sweater. Excluded from this wholesale price is the shipping cost of $1.00 per sweater which is incurred by FC. FC’s retail price is $54 per sweater. BD’s variable manufacturing cost is $15 per sweater. FC plans to make a single purchase before the start of the Fall selling season. Left over sweaters are bought back by BD. However, FC must ship every unsold sweater back to BC at a cost of $1.00 per sweater.

If BD can sell the leftover sweaters to a discounter store for $20, the profit maximizing buyback price is approximately

a. $19

b. $20

c. $27

d. $32

e. $35

Answer 1

The profit maximizing buy back price is given by the formula :-

Here, Price = Retail or Selling Price = $54

Shipping Cost = $1

Salvage Value = Value at which BD Sells to discount store = 20

Cost = Cost Incurred by BD for making a sweater

Wholesale Price = Price at which FC buys from BD ( Including Shipping Price)

Buy back Price = 1+54 –(54-28) *(54-20)/(54 – 15) = 55 +26 * 0.8718 = 32.33

Therefore, the profit maximizing buyback price is approximately $32. Option d.