A firm is able to sell 20,000 units. The company fixed cost is $8,000. Variable

Question

A firm is able to sell 20,000 units. The company fixed cost is $8,000. Variable cost is $5per unit. Contribution margin (CM) is $5 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 (hint: use the new demand)

Explanation / Answer

Answer a The markup (profit margin %) on sales price = Profit Margin / Sales Profit Margin = Contribution margin - Fixed cost Profit Margin = (20000 units * $5) - $8000 = $92000 Sales = 20000 units * $10 = $200000 The markup (profit margin %) on sales price = $92000 / $200000 = 46% The mark up on total cost (profit margin %) = Profit Margin / Total Cost Total cost = Fixed cost + Variable cost = $8000 + (20000 units * $5) = $108000 The mark up on total cost (profit margin %) = $92000 / $108000 = 85.19% Answer b The price elasticity of demand is 2,it means that 20% fall in sale price result into 40% increase in quantity sold. New sale units = 20000 units * 140% = 28000 units Answer c New selling price per unit = $10 - $2 = $8 New Contribution margin per unit = $8 - $5 = $3 New profit margin = ($3*28000 units) - $8000 = $76000 Sales = 28000 units * $8 = $224000 The markup (profit margin %) on sales price = $76000 / $224000 = 33.93% The mark up on total cost (profit margin %) = Profit Margin / Total Cost Total cost = Fixed cost + Variable cost = $8000 + (28000 units * $5) = $148000 The mark up on total cost (profit margin %) = $76000 / $148000 = 51.35% Answer d Total Profit calculation Sales (28000 units * $8) $224,000 Less : Variable cost $140,000 Contribution margin $84,000 Less : Fixed cost $8,000 Profit Margin $76,000 The profit per each toy sold = $76000 /28000 units = $2.71 per unit

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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