Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 10, Problem 7E
a)
To determine
To Evaluate: The impact of the proposal to cut prices on
- Total revenue
- Total cost
- Total profit
b)
To determine
To Evaluate: The effects of the proposed price cut on total profits, if average variable costs are assumed to remain constant over a 10 percent increase in output.
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Royersford Knitting Mills, Ltd. sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand is estimated at -2.
Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, and (3) total profits.
If average variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.
Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $20 each. Fixed costs amount to $120,000, and total variable costs equal $240,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents.
The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at −2.
The proposal to cut prices by 5 percent would total revenues from $400,000 to
. Total costs would be
and total profits would be
.
If average variable costs are assumed to remain constant over a 10 percent increase in output, total profits after a 5 percent price cut would be
.
A bakery sells pretzels. The fixed costs come to $8,750.00 per month. It will cost 35 cents to make each pretzel, and the bakery will charge $1.50 per pretzel. The bakery must sell 7,609 pretzels in a month to break even. The bakery's owners think they may not be able to sell that many pretzels. If they raise the price to $1.75, what will be the break-even point? Hint: use the Break-even point formula.
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Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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