A company introduced a new product to the market in the first month of the year which was supported by the corresponding advertising campaign and showed steady growth in the following months. The initial price was set at a level of 30% above average cost (MK). The company's goal is to cover its overheads and achieve maximization in profits and that's why I'm wondering if the price of €7,5 is optimal. With the continuous growth of sales, the company conducted market research and found that the elasticity of demand towards the price is -3. The formula for calculating the demand elasticity to the price is given: ε T = [-MK/(T-MK)] - 1 Sales (tons) and cost (mm. (EUR) For the next 3 months they are estimated as follows: JANUARY FEBRUARY MARCH Sales (volume) 2.250 2.500 2.750 Raw materials €1.400 €1.550 €1.700 Work €3.350 €4.050 €4.950 Other industrial costs €3.000 €3.075 €3.150 Administrative expenses €2.150 €2.150 €2.150 Electric - Heating €450 €475 €300 Other overheads €2.250 €2.200 €2.200 TOTAL EXPENSES €12.600 €13.500 €14.450 a ) Assuming the price may be changing, calculate the price per month. b) What percentage of markup is exported for each month?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. A company introduced a new product to the market in the first month of the year which was supported by the corresponding advertising campaign and showed steady growth in the following months. The initial price was set at a level of 30% above average cost (MK). The company's goal is to cover its overheads and achieve maximization in profits and that's why I'm wondering if the price of €7,5 is optimal. With the continuous growth of sales, the company conducted market research and found that the elasticity of demand towards the price is -3. The formula for calculating the demand elasticity to the price is given: ε T = [-MK/(T-MK)] - 1

Sales (tons) and cost (mm. (EUR) For the next 3 months they are estimated as follows:

	JANUARY	FEBRUARY	MARCH
Sales (volume)	2.250	2.500	2.750
Raw materials	€1.400	€1.550	€1.700
Work	€3.350	€4.050	€4.950

Other industrial costs	€3.000	€3.075	€3.150
Administrative expenses	€2.150	€2.150	€2.150
Electric - Heating	€450	€475	€300
Other overheads	€2.250	€2.200	€2.200
TOTAL EXPENSES	€12.600	€13.500	€14.450

a ) Assuming the price may be changing, calculate the price per month.
b) What percentage of markup is exported for each month?

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