Question

The manager of Calypso, Inc. is considering raising its current price of $34 per unit by 10%. If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 51,100 units per month, each of which costs $23 in variable costs. Fixed costs are $190,000.

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 nearest whole number.)

Answer 1

Current contrybution per unit = sales price - variable cost = $34 - $23 = $11
New contrybution per unit = sales price - variable cost = $34 +10% of $34 - $23 = $37.40 -$23 = $14.40
a. Current Profit
Current profit = Contrybution - fixed cost
	= $11 * 51,100 units - $190,000
	=   $372,100
b. Current Breakeven points in units
Current Breakeven points in units =                     Fixed costs
				Contrybution per unit
			=                    $190,000
				$11
			=                  17272.73
			=                  17273 units
c. New profit
New profit =   New contrybution - Fixed costs
	=      $14.40 * (51,100-20,000) - $190,000
	=       $14.40 * 31,100 units - $190,000
	=        $447,840 -$190,000
	=       $257,840
d. New break-even point in units
New   Breakeven point in   units =                     Fixed costs
				Contrybution per unit
			=                        $190,000
				$14.40
			=                  13,194.44
			=                  13,194 units
e. Drop in demand would be
Lets take no.of units to be X , to get same Current profit after change in sale price
$372,100 = $14.40 * X units - $190,000
$372,100 + $190,000 = $14.40X
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