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: Average Quantity Current Total Variable Cost Contribution Margin Contribution Sold Price Revenue Per Unit Per Unit Margin* Model (Units/Month) ($) ($) ($) ($) ($) A 15,000 30 450,000 15.00 15 225,000 B 5,000 35 175,000 18.00 17 85,000 10,000 45 450,000 20.00 25 250,000 Total $1,075,000 $560,000 *Contribution to fixed costs and profits. 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. The proposal to cut the price of Model A to $27 would the total revenue from Model A from $450,000 to $ The contribution margin of Model A would Now consider the entire line of tennis rackets. The price cut would the total revenue from $1,075,000 to and the contribution margin from $560,000 to $ Based on this analysis, the firm lower the price of Model A.
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: Average Quantity Current Total Variable Cost Contribution Margin Contribution Sold Price Revenue Per Unit Per Unit Margin* Model (Units/Month) ($) ($) ($) ($) ($) A 15,000 30 450,000 15.00 15 225,000 B 5,000 35 175,000 18.00 17 85,000 10,000 45 450,000 20.00 25 250,000 Total $1,075,000 $560,000 *Contribution to fixed costs and profits. 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. The proposal to cut the price of Model A to $27 would the total revenue from Model A from $450,000 to $ The contribution margin of Model A would Now consider the entire line of tennis rackets. The price cut would the total revenue from $1,075,000 to and the contribution margin from $560,000 to $ Based on this analysis, the firm lower the price of Model A.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text: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:
Average Quantity
Current
Total
Variable Cost
Contribution Margin
Contribution
Sold
Price
Revenue
Per Unit
Per Unit
Margin*
Model
(Units/Month)
($)
($)
($)
($)
($)
15,000
30
450,000
15.00
15
225,000
В
5,000
35
175,000
18.00
17
85,000
10,000
45
450,000
20.00
25
250,000
Total
$1,075,000
$560,000
*Contribution to fixed costs and profits.
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
to be
approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume.
The proposal to cut the price of Model A to $27 would
the total revenue from Model A from $450,000 to $
The
contribution margin of Model A would
Now consider the entire line of tennis rackets. The price cut would
the total revenue from $1,075,000 to $
and
the contribution margin from $560,000 to $
Based on this analysis, the firm
lower the price of
Model A.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education