Question

The manager of Calypso, Inc. is considering raising its current price of $35 per unit by 10%.If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 50,600 units per month, each of which costs $21 in variable costs. Fixed costs are $197,000.

a. What is the current profit?

b. What is the current break-even point in units? (Round your answer to the nearest whole number.)



c. If the manager raises the price, what will profit be? (Do not round intermediate calculations.)

d. If the manager raises the price, what will be the new break-even point in units? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

e. Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase? (Do not round intermediate calculations. Round your answer to the nearst whole number.)

Answer 1

a.

Current profit = Current sales - Current variable costs - Current fixed costs

Current sales = 50,600 units * $35 = $1,771,000

Current variable costs = 50,600 * $21 = $1,062,600

Current fixed costs = $197,000

Current profit = $1,771,000 - $1,062,600 - $197,000 = $511,400

b.

Break even point is the point where total revenue = total costs

Let no. of units be x

Sales = x * $35 = $35x

Variable costs = x * $21 = $21x

Fixed costs = $197,000

Therefore, $35x = $21x + $197,000

$14x = $197,000

Thus, x = 14,071 units

c.

Revised profit = Revised sales - Revised variable costs - Current fixed costs

Revised sales = 30,600 units * $38.5 = $1,178,100

Revised variable costs = 30,600 * $21 = $642,600

Current fixed costs = $197,000

Current profit = $1,178,100 - $642,600 - $197,000 = $338,500

d.

Break even point is the point where total revenue = total costs

Let no. of units be y

Sales = y * $38.5 = $38.5y

Variable costs = y * $21 = $21y

Fixed costs = $197,000

Therefore, $38.5y = $21y + $197,000

$17.5y = $197,000

Thus, y = 11,257 units

e.

The manager would want to keep the profit same as current, i.e. at $511,400

Let sales units be z

New profit = New sales - New variable costs - Current fixed costs

New sales = z * $38.5 = $38.5z

New variable costs = z * $21 = $21z

Current fixed costs = $197,000

Current profit = $38.5z - $21z - $197,000 = $511,400

$17.5z = $708,400

z = 40,480

Thus, demand would have to drop by 50,600 - 40,480 = 10,120 units.