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.a. What is the current profit?b. What is the current break-even point in units?c. If the manager raises the price, what will profit be?d. If the manager raises the price, what will be the new break-even point in units?e. 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?
What will be an ideal response?
a. $70,000 = ($30 × 50,000) - ($25 × 50,000) - $180,000
b. 36,000 = $180,000/($30 - $25)
c. $60,000 = [($30 × 1.10) × 30,000] - ($25 × 30,000) - $180,000
d. 22,500 = $180,000/($33 - $25)
e. 18,750 = 50,000 - [($180,000 + $70,000)/($33 - $25)]
Profit = (Unit price × Q) - (Unit variable costs × Q) - Total fixed costs. Break-even units = Fixed costs/Unit contribution margin. Target units = (Fixed costs + Target profit)/Unit contribution margin.
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