Asssignment III ECO
Long-Term Investment Decisions
EC0-550
June 20, 2014
Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at a average price of $10 each. Fixed cost amount to $60,000, and total variable cost equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed cost but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at -2.
First of all, I calculated the current level of production, in order to get Total Revenue (TRc), Total Cost (TCc), Total Profit (TPc) and Avarage Variable Cost (AVCc).
Total Sales = 20,000 pairs/ year
Avarage Price = $10 each
Fixed cost = $60,000
Total Variable Cost= $120,000
TRc = Qc * Pc = 20,000 * $10 = $200,000
TCc = FXc + TVCc = $60,000 + $120,000 = $180,000
TPc = TRc – TCc = $200,000 - $180,000 = $20,000
AVCc = $120,000/20,000 = $6 If the arc elasticity of demand with respect to prices is estimated at -2 and the estimation of demand increase of 10 percent could be reached the 5% of reduction in price.
Reduction in Average variable cost of 40 cent; which means: AVCf = $6 - $0.40 = $5.60
5% of reduction in price; which means: Pf = Pc – 5% = $10 - $0.5 = $9.5 = P1= $9.5 a) Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total cost, and (iii) total profits. Price elasticity of demand (Ed) is defined as Ed = % ∆Q / %∆P
Which means: % ∆Q =(-2)*(-5) = 10% (There would a 10% increase in quantity)
Q1 = Q + 10% increase = 20,000 + 2000 = 22,000
i) Total Revenue:
TR1 = Q1 * P1 = $22,000 * $9.5 = $209,000 (Increase of 4.5%) ii) Total Cost:
TC1 = FC + VC = $60,000 + ($22,000 * $5.6) = 183,200 (Increase of 2.1) iii) Total Profit:
TP1 = TR1 - TC1 = $209,000 – $183,200 = $25,800 (Increase of 29%) With price
EC0-550
June 20, 2014
Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at a average price of $10 each. Fixed cost amount to $60,000, and total variable cost equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed cost but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at -2.
First of all, I calculated the current level of production, in order to get Total Revenue (TRc), Total Cost (TCc), Total Profit (TPc) and Avarage Variable Cost (AVCc).
Total Sales = 20,000 pairs/ year
Avarage Price = $10 each
Fixed cost = $60,000
Total Variable Cost= $120,000
TRc = Qc * Pc = 20,000 * $10 = $200,000
TCc = FXc + TVCc = $60,000 + $120,000 = $180,000
TPc = TRc – TCc = $200,000 - $180,000 = $20,000
AVCc = $120,000/20,000 = $6 If the arc elasticity of demand with respect to prices is estimated at -2 and the estimation of demand increase of 10 percent could be reached the 5% of reduction in price.
Reduction in Average variable cost of 40 cent; which means: AVCf = $6 - $0.40 = $5.60
5% of reduction in price; which means: Pf = Pc – 5% = $10 - $0.5 = $9.5 = P1= $9.5 a) Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total cost, and (iii) total profits. Price elasticity of demand (Ed) is defined as Ed = % ∆Q / %∆P
Which means: % ∆Q =(-2)*(-5) = 10% (There would a 10% increase in quantity)
Q1 = Q + 10% increase = 20,000 + 2000 = 22,000
i) Total Revenue:
TR1 = Q1 * P1 = $22,000 * $9.5 = $209,000 (Increase of 4.5%) ii) Total Cost:
TC1 = FC + VC = $60,000 + ($22,000 * $5.6) = 183,200 (Increase of 2.1) iii) Total Profit:
TP1 = TR1 - TC1 = $209,000 – $183,200 = $25,800 (Increase of 29%) With price