Taylor Pennington produces and sells hammocks. One day during lunch he complaine

Question

Taylor Pennington produces and sells hammocks. One day during lunch he complained to his friend Steven Green, an economist, that he was having trouble setting prices. When he raised his prices, demand went down as expected, but he could never predict how much demand would change. “I understand my costs quite well,” Taylor commented. “I can produce hammocks for $75 each, and I incur $377,400 in fixed costs each year. I think I could manage my business much better if I had a better idea of the demand for hammocks at different prices.” Steve said he would take a look at several years’ worth of sales data and try to estimate a demand curve for the hammocks. He came up with the following table:

Sales Price Demand

$215 41,205

$205 45,034

$195 49,223

$185 53,807

$175 58,823

$165 64,311

$155 70,316

$145 76,886

$135 84,075

$125 91,941

$115 100,548

What price can be expected to result in the highest operating income?

Explanation / Answer

Answer:

We need to calculate the Operating Income with different demand and different sales prices given in the table.

From the above calculation, it is clear than highest operating income will on Demand 53,807 Units and Selling Price per unit $185..

Statement showing the Operating Income under different demand and sales price Demand Sales Price Per Unit Variable Cost Per Unit Contribution Per Unit = Sales Price - Variable Cost Total Contribution = Contribution Per Unit x Demand Fixed Cost Operating Income = Total Contribution - Fixed Cost 41205 215 75 140 5768700 $377,400 $5,391,300 45034 205 75 130 5854420 $377,400 $5,477,020 49223 195 75 120 5906760 $377,400 $5,529,360 53807 185 75 110 5918770 $377,400 $5,541,370 58823 175 75 100 5882300 $377,400 $5,504,900 64311 165 75 90 5787990 $377,400 $5,410,590 70316 155 75 80 5625280 $377,400 $5,247,880 76886 145 75 70 5382020 $377,400 $5,004,620 84075 135 75 60 5044500 $377,400 $4,667,100 91941 125 75 50 4597050 $377,400 $4,219,650 100548 115 75 40 4021920 $377,400 $3,644,520

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