Question

2. 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

			Option I			Option II			Option III
			Per unit	Total		Per unit	Total	X = 3.57	Per unit	Total	X = 0.83
	Selling Price		54	54X		36	36X	128.52	59	59X	48.97
	Variable cost		29	29X		29	29X	103.53	29	29X	24.07
	Contribution		25	25X		7	7X	25	30	30X	24.9
	Fixed cost		0	0		0	0	0	0	0	0
	Profit		25	25X		7	7X	25	30	30X	25
	P/V		46.3			19.4		19.45	50.8		51.05
(a)	initial contribution margin	$25
	P/V ratio	($25/$54*100)
(b)	33 % cut in SP = 36
	To get the same profitability
	25X = 7X
	(Assume no of units sold = X)
	break-even change in sales required to maintain its profitability =
	X = 25/7
	3.57 times X
©	When SP = 59,
	BES = 25/30
	0.83 times X
			Option I			Option II			Option III
(f)	demand elasticity = -1.5
	Sales qty		X
	By observing the P/V ratio,Option III is better