Question

The manager of Calypso, Inc. is considering raising its current price of $30 per unit by 10%. If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 50,000 units per month, each of which costs $25 in variable costs. Fixed costs are $180,000. Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase?

Answer 1

Answer:

Demand would have to drop by 27,500 units and above

Explanation:

With a proposed increase in price of 10%, Calypso would like break-even, that to ensure that its total revenue covers its total fixed costs. . This would mean the minimum quantity should be that which will produce a total contribution that  covers the total fixed cost. And would produce a profit of zero.

New selling price after  10% Increase  = 110% × $30 = $33

Minimum quantity = Total fixed / contribution per unit

Contribution per unit = selling price - variable cost per unit

                                 = $33 - $25

                                  = $8 per unit

Minimum quantity = Total fixed cost/contribution per unit

                              = 180,000/ 8

                            =  22,500 units

The decrease in demand = Current quantity - minimum quantity

                                = 50,000 - 22,500

                                =  27,500 units

Demand would have to drop by 27,500 units and above