Question

A firm can sell 15,000 units per year at $ 12.50 per piece. The company fixed cost Per year is $45,000. Variable cost is $7 per unit.

They raise the price to $15 and demand drops to 10000.

e. What is the new markup (profit margin %) on the sales price ($15)?

f. What is the new mark up (profit margin %) on total cost?

g. Please calculate the total profit for this company as well as the profit per each toy sold.

h. Are they better off raising the price?

Answer 1

Total Fixed cost = $45000
Total Variable cost = 15000*7 = $105000

Sales = 15,000

Sales Price per unit = $12.50

Total Revenue = 12.50 x 15,000 =$187500


New Sales Price per unit = $15
New Demand = 10,000

New Total Revenue = 15 x 10,000 = $150,000
New Total Variable cost = 10000*7 = $70000

Answer e:

Markup on sales price = (Total Revenue - Total Variable cost) / Total Revenue

= (150000- 70000) / 150000 = 0.5333 = 53.33%

Answer f:
Mark up on total cost = (Total Revenue - (Fixed Cost + Variable Cost)) / Total Revenue
= (150000 - (45000 + 70000)) / 150000 = 0.2333 = 23.33%

Answer g:
Total profit =  (Total Revenue) - (Fixed Cost + Variable Cost) = $35000

Profit per unit = (Total profit )/(Number of units sold) = $35000/10000 = $3.5 per toy

Answer h:
Total profit at previous price and demand i.e @ $12.50 = (Total Revenue) - (Fixed Cost + Variable Cost))  = 187500 - (45000 + 105000) = $37500

Profit per unit at previous price and demand = 37500/15000 = $2.5 per toy

So, if we treat Profit per unit as the criteria,  we can conclude that the firm is better off raising the price as they are getting higher Profit per unit when they raise the price to $15 and the demand dropped to 10000 units.


But, if we treat Total Profit as the criteria, the firm should stick with the previous price @$12.5 as it gives them a higher total profit at $37500.