A suburban lawn-care company has nonincremental fixed costs of $6,000 per month. It currently services 400 lawns per month at an average price of $30 per lawn. The company’s variable costs are $15 per lawn. If the company’s total sales increase beyond 550 lawns per month (i.e., 150 more lawns than are currently serviced), new equipment would have to be purchased that would involve incremental fixed costs of $760 per month. (a) Calculate the breakeven sales level for a $5 per lawn price increase. Show your work. (b) Calculate the breakeven sales level for a $5 per lawn price decrease. Show your work. (Hint: consider the possibility of incremental fixed costs.) (c) Data from past price changes indicates that the company can expect a price elasticity of –1.2. Based on this price elasticity, calculate the unit sales change that the company could expect from a $5 price increase. Then calculate the unit sales change that the company could expect from a $5 price decrease. Show your work.
- A suburban lawn-care company has nonincremental fixed costs of $6,000 per month. It currently services 400 lawns per month at an average
price of $30 per lawn. The company’s variable costs are $15 per lawn. If the company’s total sales increase beyond 550 lawns per month (i.e., 150 more lawns than are currently serviced), new equipment would have to be purchased that would involve incremental fixed costs of $760 per month.
(a) Calculate the breakeven sales level for a $5 per lawn price increase. Show your work.
(b) Calculate the breakeven sales level for a $5 per lawn price decrease. Show your work. (Hint: consider the possibility of incremental fixed costs.)
(c) Data from past price changes indicates that the company can expect a price elasticity of –1.2. Based on this price elasticity, calculate the unit sales change that the company could expect from a $5 price increase. Then calculate the unit sales change that the company could expect from a $5 price decrease. Show your work.
(d) Using your answers from Parts (a), (b), and (c) and the course’s change-in-profit formula, calculate the change in profit that the lawn-care company could expect for a $5 price increase and for a $5 price decrease (again, show your work). Based on these calculations, which one of these two price changes would you recommend the company carry out? Explain your reasoning.
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