Question

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $3.60 and 1,855 cones were sold. During the second week, she priced the cones at $4.10 and 1,450 cones were sold. The variable cost of a cone is $.40 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,000 per week Required: 1. What profit did Maria earn during the first week when her price was $3.60? 2. At the start of the second week, Maria increased her selling price by what percentage? What percentage did unit sales decrease? (Round your percentage answers to 2 decimal place.) 3. What profit did Maria earn during the second week when her price was $4.10? 4. What was Maria's increase (decrease) in profits from the first week to the second week? 1. Profit % % 2. Percentage increase in selling price Percentage decrease in unit sales 3. Profit 4.

Answer 1

1
Calculation of profit earned by Maria in first week
Sales revenue	$6,678	3.60*1855
Less: Variable costs	$742	0.40*1855
Contribution margin	$5,936
Less: Fixed costs	$2,000
Profit	$3,936
2.
Percentage increase in selling price	(4.10-3.60)/3.60
Percentage increase in selling price	13.89%
Percentage decrease in unit sales	(1450-1855)/1855
Percentage decrease in unit sales	-21.83%
3.
Calculation of profit earned by Maria in second week
Sales revenue	$5,945	4.10*1450
Less: Variable costs	$580	0.40*1450
Contribution margin	$5,365
Less: Fixed costs	$2,000
Profit	$3,365
4.
Decrease in profits	3365-3936
Decrease in profits	-$571
Thus, profits decrease in second week by -$571