Unit sales (a) 120,000 Selling price per unit $20.00 Variable cost per unit.. Contribution margin per unit (b). Total contribution margin (a) x (b) . 13.00 $ 7.00 Traceable fixed expenses $840,000 800,000 Net operating income $ 40,000 .....
Customer Latitude and Optimal Pricing
Northport Company manufactures numerous products, one of which is called Sea Breeze Skin Cleanser. The company has provided the following data regarding this product:
Management is considering increasing the price of Sea Breeze by 20%, from $20.00 to $24.00. The company’s marketing managers estimate that this price hike could decrease unit sales by as much as 30%, from 120,000 units to 84,000 units.
Required:
In all of the below requirements, assume that the traceable fixed expenses are not affected by the pricing decision.
1. Assuming the marketing managers’ estimate is accurate, what profit will Sea Breeze Skin Cleanser earn at a price of $24.00?
2. How many units would Northport need to sell at a price of $24.00 to earn the exact same profit that it currently earns at a price of $20.00? (Round your answer up to the nearest whole number.)
3. If Northport raises the price of Sea Breeze Skin Cleanser to $24.00, what percentage decrease in unit sales could be absorbed while still providing the same profit currently being earned at a price of $20.00? (Round your answer to the nearest one-tenth of a percent.)
4. Download the optimal pricing model from www.mhhe.com/garrison_opm. Input all of the pertinent data related to Sea Breeze Skin Cleanser into the model (including the assumptions that a 20% increase in selling price will cause a 30% decrease in unit sales). Be sure to input the current price in cell B12. Click on the Data tab in Microsoft Excel and select Solver in the upper right-hand portion of your screen. When the Solver window opens, click “Solve.”
a. What is the optimal selling price?
b. What profit is earned at the optimal selling price?
c. How much additional profit is earned at the optimal price compared to a price of $24.00?
5. Assume that a 20% increase in selling price would actually cause a 35% decline in unit sales instead of a 30% drop. Using the optimal pricing model, determine your answers to the following questions:
a. What is the optimal selling price and optimal profit if unit sales decline by 35% instead of 30% ?
b. Is the optimal price from requirement 5a higher or lower than your answer in requirement 4a? Why?
c. If a 20% increase in price causes unit sales to decrease by 35% instead of 30%, would you recommend retaining a price of $20 or implementing your optimal price from requirement 5a? Why?
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