Question

The Swiss luxury watches brand Lolex has calculated that its male model FormulaONE has an income elasticity of around +1.5. In 2018 sales of 400 units of its FormulaONE watches in UK brought in £3 million to the company. The sales director of Lolex for the UK market has just received a brief with official economic forecast data for the UK economy in 2019. It says that the most optimistic independent forecast for 2019 real incomes is a change of +4% meanwhile the most pessimistic is -2%. The sales director has decided that there will be no price changes for the coming year.

1. Calculate the best case forecast for Lolex FormulaONE watches sales in UK in £s in 2019 (real incomes increase by 4%).Optimistic forecast

2. Calculate the worst case forecast for Lolex FormulaONE watches sales in UK in £s in 2019 (real incomes fall by 2%). Pessimistic forecast

Answer 1

solution:

Income elasticity of demand transfers to the responsiveness of the amount obliged of a team to a shift in the income level of the customer. It is determined by sorting the percentage change in quantity required by the % change in income.
Income elasticity of demand = % change in quantity required / %change in income
Sales revenue = 3,000,000 p, 400 units, value of every unit = 3,000,000/400 = 7500 pounds
hence, income elasticity = +1.5

1) if real income raise by 4%, the percentage change in income = 4,
So, putting in the values:
1.5 = percentage change in quantity needed /4
percentage change in quantity needed= 1.5 x 4 = 6%,
where, (new demand(ND) - old demand(OD)/old demand) x 100 = 6
OD = 400,
hence (ND - 400)/400 x 100 = 6,
ND = 24 + 400 = 424 units,
therefore, optimistic sales revenue for 2019 = 424 X 7500 = 3,180,000 pounds.
So, the best sales outlook for Lolex watches in 2019 = 424 units also sales income of 3,180,000 pounds.

2) Soon, if the real incomes are supposed to decrease by 2%,
1.5 = percentage change in quantity NEEDED/2
where, percentage change in quantity required = 3percentage, or there is a 3% reduce in the quantity needed due to the 2% reduce in income,
hence, OD - ND/OD x 100 = 3 ,
(400 - new demand)/400 x 100 = 3
ND= 400 - 12 = 388 units
Pessimistic sales revenue of 2019 = 388 x 7500 = 2,910,000 pounds
therefore, the worst/pessimistic sales forecast for Lolex watches in 2019 = 388 units. hence , sales revenue is 2,910,000 pounds.