Determining the otimal price level
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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
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Solution Summary
Solution determines the price level which maximizes the contribution margin in the given case.
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 ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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