2. A firm is able to sell 10,000 units. The company fixed cost is $10,000. Varia
ID: 2740501 • Letter: 2
Question
2. A firm is able to sell 10,000 units. The company fixed cost is $10,000. Variable cost is $6 per unit. Contribution margin (CM) is $4. a. What is the markup (profit margin %) on sales price? What is the mark up on total cost (profit margin b. If the price elasticity of demand is 2, how many units they can sell if they drop the SP by $2. c. What is the new markup on sales price? What is the new mark up on total cost? (Hint: use the new sales) d. Please calculate the total profit for this company as well as the profit per each toy sold
Explanation / Answer
Answer to Part a.
Sales (10,000 * 10) = 100,000
Less: Variable Cost ( 10,000 * 6) = 60,000
Contribution Margin = 40,000
Less: Fixed cost = 10,000
Net operating Income = 30,000
Mark Up (Profit margin) on Sales price = Net Profit / Sales*100
Mark Up (Profit margin) on Sales price = 30,000 / 100,000 *100
Mark Up (Profit margin) on Sales price = 30%
Mark Up (Profit margin) on Total Cost = Net Profit /Total cost*100
Mark Up (Profit margin) on Sales price = 30,000 / 70,000 *100
Mark Up (Profit margin) on Sales price = 42.86%
Answer to Part 2
Price Elasticity of Demand = % change in Quantity demanded/ % change in price= 2
Current Selling price = 10
Expected Selling Price= 8
Change in Selling Price = $2
% change in price = 2/10*100 = 20%
Price Elasticity of Demand = % change in Quantity demanded/ % change in price
2 = % change in Quantity demanded / 20
40% = % change in Quantity demanded
Current Units Sold = 10,000 units
% change in Quantity demanded = 40%
Therefore, Expected Units sold = 10,000 – 40% * 10,000 = 6,000 units
Answer to Part c
Sales (10,000 * 8) = 80,000
Less: Variable Cost ( 10,000 * 6) = 60,000
Contribution Margin = 20,000
Less: Fixed cost = 10,000
Net operating Income = 10,000
Mark Up (Profit margin) on Sales price = Net Profit / Sales*100
Mark Up (Profit margin) on Sales price = 10,000 / 80,000 *100
Mark Up (Profit margin) on Sales price = 12.5%
Mark Up (Profit margin) on Total Cost = Net Profit /Total cost*100
Mark Up (Profit margin) on Sales price = 10,000 / 70,000 *100
Mark Up (Profit margin) on Sales price = 14.29%
Answer to Part d
Sales (10,000 * 10) = 100,000
Less: Variable Cost ( 10,000 * 6) = 60,000
Contribution Margin = 40,000
Less: Fixed cost = 10,000
Net operating Income = 30,000
Profit per each toy = 30,000 / 10,000 = $3
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