Question

On Friday, April 2, 1993, executives at Phillip Morris made a bold move, announcing a reduction of approximately 20 percent in the price of Marlboros. The retail price dropped from $2.20 to $1.80 a pack. The announcement sent shock waves through the cigarette industry. The reaction in the stock market was swift and punishing: Phillip Morris’s stock price dropped 23 percent in a single day, erasing $13.4 billion in stockholder value. That day was immediately dubbed “Marlboro Friday.” In Application 9.2, we learned that sales would need to increase by more than 50% for the price reduction to be profitable.

How much would Marlboro sales have had to increase in response to a price reduction to $2 for that price reduction to increase profit?

Sales need to rise by at least 25 percent.

Sales need to rise by at least 30 percent.

Sales need to rise by at least 50 percent.

Sales need to rise by at least 20 percent.

My homework said it was not Rise by at least 50 percent.

but its entirely possible my homework grading was wrong.

Answer 1

Solution :

Given That :

20% reduction of price of marlboros

Retail price dropped from  $2.20 to $1.80

stock price dropped 23 percent in a single day

erasing $13.4 billion in stockholder value

Marlboro sales have had to increase in response to a price reduction to $2 for that price reduction to increase profit :

initial price per pack = $2.2

cost per pack = $1 (assume)

initial profit per pack = $1.2

let sales be X

profit = 1.2X

New price per pack = $2

New profit per pack = $1

New sales =

New sales = 2X

Percentage increases in sales =

= 2-1

Percentage increases in sales = 100%

more than 100% increase

If new price = $1.8 pre pack

New profit = $0.8 per pack

New sales =

New sales = 1.5X

Increase =

= 0.5

Increase = 50%

increase by more than 50%

" Option (c) " is correct