Question

Atrium, a manufacturer of upscale designer tee-shirts, is considering launching an Internet operation to sell its product direct to consumers in addition to distributing through traditional bricks-and-mortar retail stores. Management believes an Internet presence should augment its retail operation. Atrium tee-shirts, made of 100% refined woven cotton, feature batik prints. The cost of producing an Atrium designer tee-shirt is $6.50 per shirt.        

Internet: In selling tee-shirts on the Web, the company must hire a Web page architect to design the page and maintain it over the course of a year. The salary for a Web page architect is $60,000, including expenses and benefits. Shipping on Internet orders, which is to be included in the retail price of the tee-shirts, is estimated to be $4.20 per shirt.

Physical Store distribution: Atrium could also sell its tee-shirts in its own retail store.  Additional in-store promotion and a local print advertising campaign for a year will cost Atrium $80,000.

Based on the above information, answer the following questions. Please Show Your Calculations.

1. Suppose Atrium manager decides to sell only through its website. If it can sell 10,000 tee-shirts from its Web page, what’s the break-even price?
2. Now assume Atrium sells only through its physical store. If Atrium tee-shirts sell for $32 at the retail stores, how many tee-shirts must Atrium sell to break even?
3. If the physical store can sell 5,000 tee-shirts at $40 a piece, how much profit can Atrium make through its physical store?

4. The retailer can sell 5,000 tee-shirts at $40 a piece. If the retailer lowers the price to $35 a piece, he can sell an additional 1,500 tee-shirts. What is the demand elasticity?

Answer 1

1. It is given that it costs $6.5 to make one shirt. In case of online, it costs further $4.2 per shirt. The fixed cost in case of online is $60000.

The total cost=60000*(6.5+4.2)*10000=60000+10.7*10000=60000+ 107000= 167000

To break even, revenue=total cost. Lets say the price is x, then

10000x=167000

x=16.7

Hence, to break even the online price should be $16.7

B. In retail store's case, the variable cost is $6.5 only, but the fixed cost increases to $80000. Lets say x number of t-shirts are sold. At break even

32x=6.5x+80000

x=3137.5.

So, Atrium must sell 3138 t-shirts to break even.

C. If atrium sells 5000 t-shirts, its costs will be

5000*6.5+80000

$112500

The revenue would be

5000*40=$200000

Hence, a profit=200000-112500=$87500

D. We know that

Elasticity of demand= %change in quantity/%change in price.

The price changes from $40 to $35, meaning

%change in price= (-5/40)=-12.5%

The demand increases by 1500 units. So,

%change in demand=1500/5000=30%.

hence,

Elasticity of demand=30/-12.5=-2.4

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