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? 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?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
II. Problem
1. 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 Sold
(Units/Month)
15,000
5,000
10,000
Variable,
Cost per
Contribution
Current
Price
Total
Margin Per
Unit
Contribution
Model
Revenue
Unit
Margin*
$225,000
85,000
250,000
$560,000
A
$30
$450,000
175,000
450,000
$1,075,000
$15
$15
B
35
18
17
C
45
20
25
Total
* Contribution to fixed costs and profits.
The company is considering lowering the price of Model A to $27 in an effort to inçrease 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.
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?
a.
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
b.
price of Model A?
Transcribed Image Text:II. Problem 1. 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 Sold (Units/Month) 15,000 5,000 10,000 Variable, Cost per Contribution Current Price Total Margin Per Unit Contribution Model Revenue Unit Margin* $225,000 85,000 250,000 $560,000 A $30 $450,000 175,000 450,000 $1,075,000 $15 $15 B 35 18 17 C 45 20 25 Total * Contribution to fixed costs and profits. The company is considering lowering the price of Model A to $27 in an effort to inçrease 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. 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? a. 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 b. price of Model A?
Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Cost of Medicare
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.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
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)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
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-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education