Question

Assignment 3: Economles 3.1 Innovation Living has registered the following information about sales, prices and variable costs per unit. Determine the optimal price and quantity based on the Total Method and the Difference Method/Marginal Method Variable cost per unit 6.000 Sales Price .000s 124 110 98 95 9.250 5.550 9.750 5325 5.100 5.325 5.550 87 10.000 80 73 10.500 54 11000 6.000 10.250 10.7505.775 3.2. The variable costs increase by 10%. How does this affect the sales volume? Make the relevant calculations 3.3. Innovation Living offers the sofa bed Hermod with two lengths of legs. The expected sales for each of them are as below Calculate the optimal price for each of them and the total profit. Here the average variable costs are set at 5.000 DKK and have a proportional development Price Sales of Hermod with 18-cm legs Sales of Hermod with 22-cm legs

Answer 1

31. Total Method involves finding the level of sales where the difference between total revenue and total cost is maximum. Whereas the marginal method involves finding the level of sales where the marginal revenue equals marginal cost. AT this level the optimum sales and price occurs.

Using the following formulas of TC, TR, MR and MC, given table is created -

TC = Sales * Variable cost (assuming fixed cost be zero as no FC is given)

TR = Sales * Price

MR = change in TR / change in sales

MC = change in TC / change in sales

Profit = TR - TC

Sales Price Variable Cost per unit TC TR MC MR Profit 124 9 6 744 1116 372 110 9.25 5.755 633.05 1017.5 7.925 7.035714 384.45 98 9.5 5.55 543.9 931 7.429167 7.208333 387.1 95 9.75 5.325 505.875 926.25 12.675 1.583333 420.375 87 10 5.1 443.7 870 7.771875 7.03125 426.3 80 10.25 5.325 426 820 2.528571 7.142857 394 73 10.5 5.55 405.15 766.5 2.978571 7.642857 361.35 62 10.75 5.775 358.05 666.5 4.281818 9.090909 308.45 54 11 6 324 594 4.25625 9.0625 270

Now as you can see in the above table that the difference between TR and TC is maximum at level of 87 sales and price of 10. Thus according to total method the optimum price is $10 and optimum sales is 87 units.

On the other hand, using the marginal method, the MR equals MC approximately at level of 87 units and price of $10.