# Study Guide

Pages: 5 (1347 words) Published: November 15, 2012
COMPANY BACKGROUND: EasyFind manufactures and sells golf balls. The company is conducting a price test to find a better price point. Presently their golf balls sell for \$19 per dozen. Their current volume is 5,470 dozen per month. They are considering reducing their sales price by 20% per dozen. QUESTION 1: What are EasyFind's total current revenues per month? \$19 * 5,470 = \$103,930 [+/- \$3,118]

Total Revenues = Price * Volume
QUESTION 2: If EasyFind's variable costs are \$10 per dozen, what is their total contribution each month at current prices? (\$19 - 10) * 5,470 = \$49,230 [+/- \$1,477]
Total contribution = Unit Contribution * units sold
QUESTION 3: What will be EasyFind's new price if they choose to implement the price decrease? \$19 * (1 - 20%) = \$15.20 [+/- \$0.46]
New Price = Old Price * (1 - Price Reduction %)
or New Price = Old Price - Old Price * Price Reduction%
QUESTION 4: If EasyFind's variable costs are \$10 per dozen, what is the contribution per dozen balls at the new price point? \$15.20 - 10 = \$5.20 [+/- \$0.16]
New contribution per dozen balls = New price - Variable Costs QUESTION 5: If EasyFind chooses to reduce its selling price to the new price point, how many units would they have to sell to generate the same monthly revenue? \$103,930 / \$15.20 = 6,838 [+/- 205]

New Units Necessary to sell = Old total revenues / New Price QUESTION 6: If variable costs are \$10 per dozen, what is the new volume required to earn the same total contribution as before the price decrease? \$49,230 / \$5.20 = 9,467 [+/- 284]

Divide original total contribution by the new unit contribution QUESTION 7: What % increase in unit sales is necessary to achieve the same level of total contribution? 9,467 / 5,470 - 1 = 0.73 [+/- 0.02] (73%) [+/- 2%]

Increase = New Volume Required / Original volume – 1

COMPANY BACKGROUND: A jacket potato vendor charges \$5.72 per spud sold. The variable cost of each potato served is \$0.91. The stall has a fixed cost of \$500 per week. QUESTION 1: How many potatoes must the stall sell in order to achieve a profit objective of \$750 per week? ((\$500 + 750) / (\$5.72 - \$0.91)) = 260 [+/- 8]

Target Volume (units) = (Fixed Cost + Profit Objective) / (Selling Price - Variable Cost). QUESTION 2: A potato shortage results in an increased variable cost per potatoes of \$.40, but selling prices remained unchanged. How many additional potatoes will the vendor have to sell to still achieve the profit objective of \$750 per week? (\$500 + 750) / (\$5.72 - (\$0.91 + .40)) - 260 = 23 [+/- 1]

Target Volume (units) = (Fixed Cost + Profit Objective) / (Selling Price - Variable Cost) - original # potatoes needed to reach objective from previous question QUESTION 3: After the shortage, prices return to previous levels and the owner decide to lower prices to \$3.00 per potato. How many potatoes have to be sold to realize the target profit objective of \$750? (750 + \$500) / (3 - \$0.91) = 598 [+/- 18]

Divide the sum of profit and fixed cost by the new contribution margin per potato. QUESTION 4: What percentage increase in volume sold does the answer in Q3 represent? (598 - 260) / 260 = 1.30 [+/- 0.04] (130%) [+/- 4%]

Increase in target volume with new price divided by original target volume. QUESTION 5: What is the percentage decrease in unit contribution resulting from the drop in price to \$3.00? ((\$5.72 - \$0.91) - (3 - \$0.91)) / (\$5.72 - \$0.91) = 0.57 [+/- 0.02] (57%) [+/- 2%] Take the difference between the original contribution and the new contribution and divide by the original contribution. or Divide the new contribution by the old contribution and subtract from 1

COMPANY BACKGROUND: Kai sells a small magazine full of celebrity gossip to college students for \$2.21 per copy. Hiring the printing press for one day, the only fixed cost, is \$372 an issue. The variable cost of printing each issue is \$0.83 per copy. The printer tells Kai the cost of hiring the press is to increase by \$135 per day. QUESTION 1:...