AVERAGE QUANTITY VARIABLE CONTRIBUTION COST PER SOLD (UNITS/ ΜΟΝΤΗ) CURRENT TOTAL MARGIN PER CONTRIBUTION MODEL PRICE REVENUE UNIT UNIT MARGIN* A 15,000 $30 $450,000 $15.00 $15 $225,000 5,000 35 175,000 18.00 17 85,000 C 10,000 45 450,000 20.00 25 250,000 Total $1,075,000 $560,000 *Contribution to fixed costs and profits.
Tennis Products, Inc., produces three models of high-quality tennis rackets. The following table contains recent information on the sales, costs, and profitability of the
three models:
The company is considering lowering the price of Model A to $27 in an effort to
increase the number of units sold. Based on the results of price changes that have
been instituted in the past, Tennis Products’ chief economist estimates the arc price
elasticity of demand to be 2.5. Furthermore, she estimates the arc cross elasticity of
demand between Model A and Model B to be approximately 0.5 and between Model
A and Model C to be approximately 0.2. Variable costs per unit are not expected to
change over the anticipated changes in volume.
a. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution
margin of Model A. Based on this analysis, should the firm lower the price of
Model A?
b. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution
margin for the entire line of tennis rackets. Based on this analysis, should the firm
lower the price of Model A?
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