One way to maintain exclusivity for a brand is to raise its price.? That\'s what
ID: 358636 • Letter: O
Question
One way to maintain exclusivity for a brand is to raise its price.? That's what luxury fashion and leather goods maker Louis Vuitton did. The company did not want the brand to become overexposed and too? common, so it raised prices 5 percent and is slowing its expansion in China. The Louis Vuitton brand is the largest contributor to the? company's $13.3 billion revenue from its fashion and leather? division, accounting for? $8 billion of those sales. It might seem counterintuitive to want to encourage fewer customers to purchase a? company's products, but when price? increases, so does the? product's contribution? margin, making each sale more profitable.? Thus, sales can drop and the company can still maintain the same profitability as before the price hike. If a? company's original contribution margin was 35%, calculate the new contribution margin if price is increased 5%.
Explanation / Answer
To be calculated:
New contribution margin
Solution:
Since, the price per unit is not given in the case, let us assume the old price (before price hike) to be $1.00 per unit.
Old price = $1.00/unit
Unit contribution = $0.35/unit
Variable cost = $0.65/unit
Contribution margin = ($0.35 / $1.00) x 100 = 35%
If the price is increased by 5%
New Price = $1.05
Increase in price will not have any impact on the variable cost of the product,
Variable cost = $0.65/unit
Unit contribution = $1.05 - $0.65 = $0.40/unit
New contribution margin = ($0.40 / $1.05) x 100 = 38.1%
New contribution margin = 38.1%
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