Bright Inc., manufactures table lamps and is considering raising the price by $5

Question

Bright Inc., manufactures table lamps and is considering raising the price by $50 a unit for the coming year. With a $50 price increase, demand is expected to fall by 2200 units.

                                                                            Currently             Projected

                Demand                                               21,000 units         18,800 units

                Selling price                                        $160                       $210

                Variable costs per unit                    $120                       $120

Bright Inc., has a capacity to produce 26,200 units. Due to an increase in the electricity costs, there is a sudden spike in demand by 2200 units. If the company adopts peak-load pricing policy and charges a premium of 20% over the current sales price, what is the total contribution on the sale of additional units?

Explanation / Answer

Under Peak Load Pricing Policy, 20% premium is charged on current sales price

Selling Price =$210x1.20 = $252

Contribution per unit =Selling price - Variable Cost = $252 - 120 =$132

Total contribution from additional 2200 units =$132x2200 =$290,400

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