Question

The Prestige Office Equipment Company produces and sells different types of office furniture. One of the important items it sells is a high quality desk. During the past year, Prestige sold 5,000 of these at a price of $500 each. The contribution profit for this line of furniture last year was $700,000.

A consultant suggests that Prestige decrease the price of each desk by $30. In his opinion, another 500 desks could then be sold, and the profit would be maintained. A trade publication that employs an economist has estimated price elasticity of office furniture (including desks) to be about -1.8.

Assume the variable unit cost per desk in the coming year will remain the same. Evaluate the proposal. Be sure to include in your answer the price elasticity assumed by the consultant, as well as the published elasticity estimate.

Answer 1

Auswul The prestige office equipment Company sells a high quality desk for $500 each is Hunce price P= $500 / desk Roolit T = $.700,000 - Now we know to tal probt Total revenue- Total cost. -Now, quantity sold (2) = 5000 high quality desk. Now, Total Proft = Total revenue (PRG) - Total cost. 7 700,000 = 15000 5000) - Total cost. -> 700,00 2500,000 =- Total cost i 7 Total cost $ 1,800,000 lt 200 Now, Variable cost (UC) = $1800,000 Il tuce, variable cost pu unit of high quality desk ve -... 18.00, 000 $_360 2 5000 There are two options, either to listu to the consultant or to listu to a trade publication appoint cel economist: Now, in case of the Consultant! A consultant suggests that Prestige Shoud decrease the price of each desh by $30, - Hunce the price should decrease from $500 to $30 Now% change in the Puce of desk - Change in Price x100 I initial price 30_ X_200 - 6% - sco | Now, as a result of decline in pice kiom & 500 to $30 Sale Could increase by 500 desks. Camſcanner

1. Hince x en quantity demanded change in quantity to ad uso a inital quantity 5.00 X 100 - tofa - Sooo puce elasticity (Edi east city (Eda - You c/ochage in quantity demanded % change in Price - in 10% = 116 16 % total revcrime will be according to this prop Now, ccording to this proposal? (500-300x ( 5000 7500) = (470)(5500) = 2,585,500 Totul pu unt variable cost = $360 and now to the a uantity i 5500 henie total cost = 660) og = 2,980,000 Il now, the probt will be Total revenue - To the cost = $(2585,000 - 1,989.000) = $ 605, Now, in case of a trade publication appointed economist! Now, a trade publication that employs an economist has estimated puce elasticity of office furnit me to be about - 1.8. I Huce absolute value of the elasticity=118 I which is higher than the elasticity suggested by the consultant. Now, elasticity higher means that demand cure will be more tlalter and conswer's I will respond more to a Puce Clouge. Huce a Smaller price fall will increase the quantity by a large an out, and the revuse is also tune. I Now, increase in sales Cquantity also means high vaciable cost hence Proht = Totul reveme - To tal cost

will fall Now, in case of Puce elasticity demand of 1.6 profit will fall by g( 700,000-605,000 = $ 95,000.- and in case of trade publication appointed economist, profit level will be lown them the proft level we get in consultant I Hunce, The prestige office equipment compay i tillen moet accept both the proposals La CamScanner Case