Question

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 $5.80 and 2,460 cones were sold. During the second week, she priced the cones at $6.30 and 2,000 cones were sold. The variable cost of a cone is $1.50 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,055 per week.

Required:

1. What profit did Maria earn during the first week when her price was $5.80?

2. 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.)

3. What profit did Maria earn during the second week when her price was $6.30?

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

Answer 1

Answer to Q1

Sales for Wk1   =     2460*$5.80 ; $14,268

Variable Cost =        2,460*$1.50 ; $3,690

Fixed Cost =                                $2,055

Profit          =                               $8,523

Answer to Q2

At the Start of Second week price increased = ($6.3-$5.8)/$5.8 ; 8.62%

Unit sales Decreased = (2000-2460)/2460 = 18.69%

Answer 3

Profit in second week is calculated as below:

Sales        = 2,000*$6.30 ; $12,600

Variable Cost = 2000*$1.5 ; $3,000

Fixed Cost =                      $2,055

Profit             = $12,600-$3,00-$2,055 ; $7,545

Answer to Q4

Profit increase/Decrease from first to second week;

Change in profit: ($7,545-$8,523)/$8,523 ; 11.47% Decrease