Suppose as a manager of a profitable department store you are confronted with a

Question

Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers a high-end type that are willing to pay a price of $25 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $15 for the some pair of jeans Your marginal rents are $13 per jeans. Your survey of your customers for jeans tells you that 60% of your customers arc of the high end type and 40% are of the low end type. If you decided to price high, what would lie your expected profits per unit. If you decided to price low, what would be your expected profits per unit Which pricing will you choose, based on the expected pricing per unit.

Explanation / Answer

Answer a) At the Price $25

Assuming number of customers for Lewis Jeans is x,

40% of the customers will not buy the jeans due to high price. Considering only 60% of the customers will be willing to buy the jeans at high cost,

Total Sales = 25 * 60x/100 = 15x

Total Cost = 13*60x/100 = 7.8x

Average Expected Profit = (15x - 7.8x)/x = 7.2x/x = $7.2

Answer b) At the price $15,

Assuming number of units sold to be x,

Total Sales = 15 * 60x/100 + 15 * 40x/100 = 15x

Total Cost = 13*x = 13x

Average Expected Profit = (15x -13x)/x = 2x/x = $2

Answer c)

The estimated average profit is more at the price of $25, we choose expected pricing per unit as $25.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.