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Product X is selling for $40/unit. Its variable costs are $20/unit. Fixed costs associated with this...

Product X is selling for $40/unit. Its variable costs are $20/unit. Fixed costs associated with this product are $300,000/year. The company expects to sell 250,000 of Product X a year.

What is the current annual profit of Product X?
What is the breakeven point in units for Product X?
Suppose the company decides it wants to charge a 20% markup on cost. What would the target return price of Product X be?
The company decides not to change the price of Product X to the price calculated in #3 and keeps the $40/unit. But in response to competition, the price of Product X drops to $36 and the company sells 260,000 units that year. Calculate the price elasticity of demand based on the original price and data and the latest price and data.

Solutions

Expert Solution

Solution:

The selling price of the product = $40 / unit

variable cost = $20 / unit

Fixed cost = $300,000 / year

Quantity sold = 250,000

Part A ) The current annual profit of Product X

Part B )

The breakeven point is the point where there is no profit and no loss.

Suppose Q is the breakeven quantity.

Part C )

Total cost when the quantity produced is 250,000

Total cost = $20*250,000 + 300,000 = 5,300,000

Markup of 20% over it = 5,300,000 * (1.20) = 6,360,000

Now in order to earn $4,700,000 profit, the price should be

4,700,000 = 250,000 * P - 6360000

P = 11060000 / 250000 = $44.24

Part D )

% chnage in quantity = 10,000 / 250,000 = 0.04

% chnage in price = 4/40 = -0.1

jeff jeffy answered 1 year ago

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