# Interpreting the elasticity values in the given case

Golden Star Winery produces mid level wines consumed primarily in North America. Given below is the projected income statement for the company for 2011.

Projected Income Statement (2011)

Sales (100,000 cases at $7 per case) $700,000

Cost of goods sold:

Materials $180,000

Labor $225,000

Fixed manufacturing expenses $45,000

Administrative and selling expenses:

Delivery $30,000

Commissions $50,000

Advertising $10,000

Travel $5,000

Fixed administrative and selling expenses $15,000

Total expenses $560,000

Net income before taxes $140,000

Using Excel, prepare a graph showing the breakeven point and any profit or loss at the current price of $7. Explain to the Golden Star management the implications of this analysis.

What is the elasticity coefficient for each price between $6.50 and $7.50? Is the demand elastic or inelastic at these points? How can this information be useful to management in its pricing and output decisions?

On the basis of your calculations and the information above, what recommendations would you make to Golden Star in terms of price and output levels?

Complete the following table in a Microsoft Excel spreadsheet.

Price Quantity Total Revenue Total Variable Cost Total Fixed Cost Total Cost Profit

$8.00 65,000 - - - - -

$7.75 75,000 - - - - -

$7.50 80,000 - - - - -

$7.25 90,000 - - - - -

$7.00 100,000 - - - - -

$6.75 115,000 - - - - -

$6.50 120,000 - - - - -

#### Solution Preview

Please refer attached file for better clarity of table and missing expressions/graph.

Using Excel, prepare a graph showing the breakeven point and any profit or loss at the current price of $7. Explain to the Golden Star management the implications of this analysis.

Let us separate out fixed and variable expenses first.

Fixed Expenses

Fixed Manufacturing expenses $45,000

Advertising $10,000

Fixed administrative/selling expenses $15,000

Total $70,000

Variable Expenses

Materials $180,000

Labor $225,000

Delivery $30,000

Commissions $50,000

Travel $5,000 (I am considering travel expense as variable expense)

Total $490,000

Fixed Expanses, F=$70,000

Variable cost per unit=V=490000/100000=$4.90

Output level Fixed Cost Variable Cost Total Cost Total Revenue Profit

Q F TVC=V*Q TC=F+TVC TR=7*Q TR-TC

0 70000 0 70000 0 -70000

20000 70000 98000 168000 140000 -28000

33333 70000 163333 233333 233333 0

60000 70000 294000 364000 ...

#### Solution Summary

Solution develops CVP graph and calculates price elasticity of demand in the given price range. It also interprets the elasticity values and discusses its implications in decision making.