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Determining the otimal price level

Sunny Valley Orchards is reevaluating the pricing of its fresh-squeezed orange juice in half-gallon containers. Variable costs per half-gallon container of fresh-squeezed orange juice are $1.50. Based on Sunny Valley's market study, the management has determined that the price per half gallon should be between $2.50 and $3.

Considering only prices in increments of 5 cents, which price should Sunny Valley choose to maximize its contribution margin from sales of half-gallon fresh-squeezed orange juice?

Price per Half Gallon Estimated Demand(Half-Gallon Units)
$2.50 75,000
2.55 72,500
2.60 70,000
2.65 67,500
2.70 65,000
2.75 62,500
2.80 60,500
2.85 57,500
2.90 55,000
2.95 52,500
3.00 50,000

Solution Preview

Please refer attached file for better clarity of table.

Price,P Demand Q AVC TVC=AVC*Q Marginal Cost Total Revenue Marginal Revenue Contribution Margin
MC* TR=P*Q MR** TR-TVC
3.00 50000 1.50 75000 150000 75000
2.95 52500 1.50 78750 1.50 154875 1.95 ...

Solution Summary

Solution determines the price level which maximizes the contribution margin in the given case.

$2.19