Arrow now sells 100,000 silk shirts at $100 each. The material per shirt costs $40 and labor costs are $50 per shirt. The firm has $1.2m. In fixed costs. Price elasticity of demand for such shirts is -4. The firm is considering lowering the price by 20% to $80. At the higher output, labor cost per shirt is expected to drop by 22% and the raw material supplier will offer a 15% discount on materials.
a. What is the profit position of the firm at the moment?
b. Would you advise the firm to cut prices? Why?© BrainMass Inc. brainmass.com October 10, 2019, 4:55 am ad1c9bdddf
a. Current Variable costs=TVC1=(40+50)*100000=$9,000,000
Solution determines the profit levels in current and proposed scenario. It also determines if the proposed price cut is advisable.