Question

Assume that a teeth-whitening kit manufacturer wishes to achieve a markup 10% of the total cost.

Assuming that the variable costs per unit is $8.00, fixed costs is $1,000,000.00 and the expected sales is 1,000,000 units, what should be the target return price?

For the same teeth-whitening kit manufacturer, it is observed that when the kit is priced at $10.00 (P1), the quantity demanded is 1,000,000 (Q1). However, when the price is increased to $15.00 (P2), the quantity decreases to 500,000 (Q2).

What is the percentage change in quantity demanded?

What is the percentage change in price?

How much is the price elasticity demand?

Answer 1

(1) Given information

Fixed cost = $1,000,000

Variable cost = $8 per unit

Expected sales (Output) = 1,000,000 units

Total cost = Fixed cost + Variable cost

=> Total cost = $1,000,000 + $8 (1,000,000)

=> Total cost = $9,000,000

Markup = 10% = 0.1

Price = [Total cost * (1 + markup)] / units sold]

=> Price = [$9,000,000 (1 + 0.1) / 1,000,000]

=> Price = $9.9

Answer: Target return price is $9.9

--------------------------------------------------------------------------------

(2)  kit is priced at $10.00 (P1), the quantity demanded is 1,000,000 (Q1). However, when the price is increased to $15.00 (P2), the quantity decreases to 500,000 (Q2).

% change in quantity demanded = [(Q2 - Q1) / Q1]*100

% change in quantity demanded = [(500,000 - 1,000,000) / 1,000,000 ] *100

% change in quantity demanded = = - 50 %

------

% change in price = [(P2 - P1) / P1]*100

% change in price =  [(15 - 10) / 10] *100

% change in price = 50%

-----

price elasticity = % change in quantity demanded / % change in price

price elasticity = -50% / 50%

price elasticity = - 1