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1.A company sells a product at a price of $10 per unit. The unit variable cost is $4. The sales manager believes that, by offering a customer 5% of buying at least 5,000 units a year, the customer will increase purchases from their current level 4,000 units to a level of 5,000 units per year. What is the annual profit volume based price discounting?
-The answer is $3,500
-Could you help me to obtain the answer?I think you have mistyped the question (if not then there is a typing error in the question).
Currently the profit is 4,000 x (10 – 4) = 24,000.
With the discount, the profit will be 5,000 x ((95% x 10) – 4) = 27,500
So the increase in the profit will be 27,500 – 24,000 = 3,500.
Dear sir,
In your lectures, concerning example 4, you have said;”For every 2500 change in Q, the price will change by B x it”. Could you explain what do you meant by that?Thanks.
b = 1/2500
Therefore for the demand to change by 2500 the price will change by 1/2500 x 2500 = $1
For the demand to change by 5000, the price will change by 1/2500 x 5000 = $2
and so on.Concerning example 5, to have the a demand of zero, we need to have the demand to fall by 2,000 units. If for an additional sales of 100 units, we have to reduce price by $1; then how can we expect the demand to reduce by 0 units?
If we continue reducing the price by $1, demand will continue increasing by 100 units, therefore making it impossible to have a demand of 0.
Could you please clarify?
Why on earth would we want to reduce the price?
As I explain the lecture, ‘a’ is the price when the demand is zero. To reduce the demand we need to increase the selling price. For every $1 increase in the price, the sales will reduce by 100 units.
Could you briefly explain how “the strength of and sensitivity of demand to price are unknown” could be a suitable condition of a market skimming?
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