Question

Gayle is thinking of starting her own business. Total fixed costs are $19,000 per month and unit variable costs are estimated at $37.50. From some preliminary studies that she completed, she forecasts sales of 1,400 units at $50 each, 1,850 units at $48 each, 2,500 units at $46 each, and 2,750 units at $44 each. What price would you recommend Gayle set for her products? 

Answer 1

When price = $\$50$ then sales =1400 units

Revenue = (sales) $×$ (price) (1400) $×$ (50) = $\$70,000$

cost = (variable) + (fixed)

=1400 (37.5) + 19,000 = $\$71,500$

Profit= (Revenue) - (Cost)

= $-\$70000-\$71,500$

=$-\$1500$

Hence,Loss = $\$1500$

when price = $\$48$ sales = 1850 Revenue = (1850) $×$ (48) =$\$88,800$

Cost = 1850 (37-5) + 19,000 =$\$88,375$

Profit= $\$88,800 - \$88,375 = \$425$

Profit = $\$425$

When price = $\$46$ , sales = 2500

Revenue = (2500)x (46) =$\$115,000$

cost = 2500(37.5) + 19,000 =$\$112,750$

Profit;$\$115,000 - \$112,750 =\$2,250$

Profit= $\$2,250$

When price = $\$44$ , sales = 2750

Revenue = (2750)x (44) =$\$121,000$

cost = 2750(37.5) + 19,000 =$\$122,125$

Profit=$\$121,000-\$122,125 =-\$1,125$ Loss = $\$1,125$

He should choose a price of $\$46$ since it gives the most profit