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# price and profit calculations

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1. You have estimated demand for the Sand Hill Journal Online to be different for Stanford students and venture capitalists on Sand Hill Road. You are proud of having come up with the demand functions and go in to visit with your CEO. You present the following demand functions:
Demand of Stanford students: QS = 100-P
Demand of venture capitalists: QV = 300 - 2P

Instead of congratulating you and sending you on your way, she immediately asks you the following questions. Assume that the cost function is TC = 9,000 + 10Q

A. What price should I charge for subscriptions if I want to set a single price?
B. What if I could somehow set a different price for Stanford students what price should I charge them? Will that change the price I charge the VC's?
C. Which should I do - one price or two?
D. Are consumers getting a better deal with one price or two?
E. If I think it costs \$500 to create a separate marketing system to separate and enforce different pricing, should I do it?
F. There is a risk of losing some business if I charge separate prices - some of those cheapskate VCs will pose as Stanford students to get the discount. What percentage of them can do this before I have to cut off a Stanford discount?
G. (Qualitative answer.) You suddenly realize that your demand estimates might have some uncertainty in them. How might you change the amount of surplus you give to the two types because of this?

2. Instead of enforcing different prices for students and venture capitalists because you concluded that too many of the VCs would claim to be students, she wants to come up with two versions of the Sand Hill Road Journal. The first will be the high quality version with up to the minute venture deals and the other only reports deals a week later. Marginal cost is zero.

There are 45 VCs who are willing to pay \$80 per month for the high quality journal and \$50 for the low quality journal. There are 55 students willing to pay \$35 for the high quality journal and \$30 for the low quality journal.

What would you recommend to your boss - 1 version or 2? If 1 version, high quality or low? Explain why (show price and profit calculations).

https://brainmass.com/economics/utility-demand/price-and-profit-calculations-55485

#### Solution Summary

This posting shows price and profit calculations.

\$2.19

## High-low methods, accounting analysis, CVP, and leverage

EXERCISE4-5. High-Low Method

Campus Copy & Printing wants to predict copy machine repair expense at different levels of copying activity (number of copies made). The following data have been gathered: (see attached)

Required
Determine the fixed and variable components of repair expense using the high-low
method. Use copies made as the measure of activity.

EXERCISE 4-8. Account Analysis

Reef Office Supplies is interested in estimating
the cost involved in hiring new employees. The following information is available regarding
the costs of operating the Human Resource department at Reef Office Supplies
in May when there were 50 new hires.

Human Resource Department
May
Staff salaries \$25,000
Manager salary 7,000
Office supplies 200
Depreciation of office equipment 300
Share of building cost (based
on square feet occupied by
Human Resources) 1,500
Total \$34,000

Required
a. Use account analysis to determine fixed cost per month and variable cost per new
hire.
b. The company is planning to hire 60 employees in June. Estimate the total cost of
Human Resources for June..
c. What is the expected incremental cost associated with hiring 10 more employees
than were hired in May?

EXERCISE 4-12. CVP Analysis, Profit Equation

Clyde's Marina has estimated that fixed costs per month
are \$240,000 and variable cost per dollar of sales is \$0.60.

Required
a. What is the break-even point per month in sales?
b. What level of sales is needed for a monthly profit of \$60,000?
c. For the month of July, the marina anticipates sales of \$1,200,000: What is the expected level of profit?

EXERCISE 4-17. Operating Leverage
(see attached for data)
Required
a. Calculate profit as a percent of sales in the prior year.
b. Suppose sales in the current year increase by 20 percent. Calculate profit as a percent
of sales for the new level of sales and explain why the percent is greater than the
one calculated in Part a.

EXERCISE 4-18. Constraints

Dvorak Music produces two durable music stands:

Stand A Stand B
Selling price \$80 \$70
Less variable costs 20 40
Contribution margin \$60 \$30

Stand Arequires 5 labor hours and standB requires 2 labor hours. The company has
only 320 available labor hours per week. Further, the company can sell all it can produce
of either product.

Required
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 10 additional labor hours?

PROBLEM 4-12. Multiproduct CVP

Fidelity Multimedia sells audio and video equipment
and car stereo products. After performing a study of fixed and variable costs in the
prior year, the company prepared a product-line profit statement as follows:

Fidelity Multimedia
Profitability Analysis
For the Year Ended December 31,2007
Audio Video Car Total
Sales \$3,000,000 \$1,800,000 \$1,200,000 \$6,000,000
Less variable costs:
Cost of merchandise 1,800,000 1,260,000 600,000 3,660,000
Salary part-time staff 120,000 80,000 30,000 230,000
Total variable costs 1,920,000 1,340,000 630,000 3,890,000
Contribution margin 1,080,000 460,000 570,000 2,110,000
Less direct fixed costs:
Salary, full-time staff 300,000 250,000 210,000 760,000
Less common fixed costs:
Utilities 20,000
Total common fixed costs 690,000
Profit \$660,000

Required
a. Calculate the contribution margin ratios for the audio, video, and car product lines.
b. What would be the effect on profit of a \$100,000 increase in sales of audio equipment
compared with a \$100,000 increase in sales of video equipment, or a \$100,000
increase in sales of car equipment? Based on this limited information, which product
line would you recommend expanding?
c. Calculate the break-even level of sales for the company as a whole.
d. Calculate sales needed to achieve a profit of \$1,500,000 assuming the current mix.
e. Determine the sales of audio, video, and car products in the total sales amount calculated
for Part d.

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