Question

Problem 3-39

Taylor Pennington produces and sells hammocks. One day during lunch he complained to his friend Steven Green, an economist, that he was having trouble setting prices. When he raised his prices, demand went down as expected, but he could never predict how much demand would change. “I understand my costs quite well,” Taylor commented. “I can produce hammocks for $67 each, and I incur $392,600 in fixed costs each year. I think I could manage my business much better if I had a better idea of the demand for hammocks at different prices.” Steve said he would take a look at several years’ worth of sales data and try to estimate a demand curve for the hammocks. He came up with the following table:

Sales Price		Demand
$207		41,201
$197		45,030
$187		49,219
$177		53,803
$167		58,819
$157		64,307
$147		70,312
$137		76,882
$127		84,071
$117		91,937
$107		100,544

What price can be expected to result in the highest operating income? Price: $177

B) What is the markup on variable cost at the price you selected in part (a)? (Round markup percentage to 2 decimal places, e.g. 0.38.)

Answer 1

The answer has been presented in the supporting sheet. Firstly selling price calculated which generated highest profit and mark up percentage has been calculated on variable cost. For detailed answers refer to the supporting sheet.