a What is the initial contribution margin b Suppose it is co

(a) What is the initial contribution margin?

(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in sales required to maintain its profitability?

(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability?

(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve for the retailer.

(e) Suppose the retailer’s market research team determines that the elasticity of demand for consumers of blenders is – 1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves.

(f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $54?

This is an exact full question, no picture or other information

2. Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from the manufacturer. (a) What is the initial contribution margin (b) Suppose it is considering a 33% cut in price to boost sales, what is the break-even change in sales required to maintain its profitability? (c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability? da usingthe break erenchne sles ou obainrese evencane for the retailer. (e) Suppose the retailer\'s market research team determines that the elasticity of demand for consumers of blenders is 1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves. (f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $547

Solution

a)  Initial contribution margin = $ 25 or 46.30% of selling price.

Selling price $54 Less purchase cost i.e. variable cost $29 ( $ 25 / $ 54 %)

b ) Reduction in selling price by 33% = reduction in margin by 33 %

Break - even sales required to be increased by 46.30 %.

Old margin $ 25. New margin $ 16.75. Net reduction in margin $ 8.25. Reduction in break even sales

calculated by ( Net Reduction in margin / New Margin ) ( 8.25 / 16.75 % )

c) New selling price is $ 59, Increase in price by 5 $ or 9.26% = increase in contribution by 9.26%.

The break even sales will reduced by 8.47% .

Old margin $ 25. New margin $ 27.31. Net increase in margin $ 2.31.

Increase in break even sales calculated as ( Net increase in margin / New margin ) ,

i.e. ( 2.31 / 27.31 ) = 8.47%