Question

15.

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $3.60 and 1,855 cones were sold. During the second week, she priced the cones at $4.10 and 1,450 cones were sold. The variable cost of a cone is $.40 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,000 per week.

Required:

a. What profit did Maria earn during the first week when her price was $3.60?

b. At the start of the second week, Maria increased her selling price by what percentage? What percentage did unit sales decrease? (Round your percentage answers to 2 decimal place.)

c. What profit did Maria earn during the second week when her price was $4.10?

d. What was Maria's increase (decrease) in profits from the first week to the second week?

Answer 1

Ans:

a.

Week 1:

Sale price : $3.60 per unit

Sales Unit : 1,855

Sales Value : 1,855*$3.60 = $6,678

Variable costs: $0.40 per unit

Total variable costs : 1,855*$0.40 = $742

Fixed Costs : $2,000

Profit : Sales - Total variable costs - Fixed costs

= $6,678 - $742 - $2,000 = $3,936

b.

Selling Price Week 1: $3.60

Selling Price Week 2 : $4.10

Increase in Price : $4.10 - $3.60 = $0.50

Increase in % of price : $0.50/$3.60 = 13.89%

Sales Unit Week 1 : 1,855

Sales Unit Week 2 : 1,450

Decrease in sales units : 1855 - 1450 = 405

Increase in % of sales units : 405/1,855 = 21.83%

c.

Week 2:

Sale price : $4.10 per unit

Sales Unit : 1,450

Sales Value : 1,450*$4.10 = $5,945

Variable costs: $0.40 per unit

Total variable costs : 1,450*$0.40 = $580

Fixed Costs : $2,000

Profit : Sales - Total variable costs - Fixed costs

= $5,945 - $580 - $2,000 = $3,365

d.

Profit in week 1 : $3,936

Profit in week 2 : $3,365

Decrease in profit : $3,936 - $3,365 = ($571)

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