Table 1: Pepita Disco Performance, 2011 (UYU in millions) Units sold 100 million units Revenue 200...

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Table 1: Pepita Disco Performance, 2011 (UYU in millions) Units sold 100 million units Revenue 200...

Table 1: Pepita Disco Performance, 2011 (UYU in millions)

Units sold	100 million units
Revenue	200
Variable costs
Materials	30
Direct labor(manufacturing,sales)	40
Opearational costs(manufacturing,inventory,delivery)	30
Other variable costs	20
Margin on Sales	80
Fixed Costs
Marketing and advertising	10
Research and development	10
Other fixed costs(e.g head office)	40
Net margin	20

Now, imagine a similar company, called Yuckles Pet Products, which sells more expensive products than Pepita Disco. It has exactly the same revenues, total fixed costs, and total variable costs as Pepita Disco, so its financials look exactly the same except that Yuckles sold 40 million units.

1. What would be the absolute and percentage effect on net margin if Yuckles were to:

a.) Lower its price 10% with an elasticity of –1.7?

business accounting

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Answer 1

Answer #1

1. Current price/product for Yuckles = Total Revenue/Total Units = 200/40 = $ 5/Product

If Yuckles lower its price 10% with an elasticity of –1.7

Revised Price = 5 - (10% of 5) = $ 4.5/product

Demand would increase by = 40 Million * 17% = 46.8 Million

Calculation of variable cost per unit
Units sold (Yuckles)	40 million units	Per Unit
Revenue	200	5
Variable costs
Materials	30	0.75
Direct labor(manufacturing,sales)	40	1
Opearational costs(manufacturing,inventory,delivery)	30	0.75
Other variable costs	20	0.5


Revised Profit table for 46.8 million units

Units sold (Yuckles)	46.8 million units	Per Unit
Revenue	210.6	4.5
Variable costs
Materials	35.1	0.75
Direct labor(manufacturing,sales)	46.8	1
Opearational costs(manufacturing,inventory,delivery)	35.1	0.75
Other variable costs	23.4	0.5
Margin on Sales	70.2
Fixed Costs
Marketing and advertising	10	NA
Research and development	10	NA
Other fixed costs(e.g head office)	40	NA
Net margin	10.2

Absolute increase in net margin = 10.2 -20 = $ 9.8 Million decrease in margin

Percentage effect = -9.8/20 = 49%

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Answer 2

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