Question

solve these questions with some solving process

Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from the manufacturer.
(a) What is the initial contribution margin?
(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in sales required to maintain its profitability?
(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability?
(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve for the retailer.
(e) Suppose the retailer's market research team determines that the elasticity of demand for consumers of blenders is —1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves.
(f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $54?

Answer 1