Question

The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high- value St. Vincent stamps depicting a common theme, such as the life of Princess Diana. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service $0.80 each. St. Vincent has been selling these souvenir sheets for $9.00 each and ordinarily sells about 54,000 units. To test the market, the postal service recently priced a new souvenir sheet at $10.00 and sales dropped to 44,000 units. Required: 1a. Calculate the contribution margin for sale price of $9.00 each or $10.00 each? $9.00 Price $10.00 Price Unit sales Sales Cost of goods sold Contribution margin 1b. Does the postal service of St. Vincent make more money selling souvenir sheets for $9.00 each or $10.00 each? $9.00 $10.00 2. Estimate the price elasticity of demand for the souvenir sheets. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places.) Price elasticity of demand 3. Estimate the profit-maximizing price for souvenir sheets. (Do not round intermediate calculations Round your answer to 2 decimal places.) Profit-maximizing price

Answer 1

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St. Vincent.
Answer 1 a
Workings
Units sold	54,000.00	44,000.00
Cost per unit	0.80	0.80
Cost of goods sold	43,200.00	35,200.00
Calculation of contribution margin	$ 9.00 price	$ 10.00 price
Unit sales	54,000.00	44,000.00
Sales	486,000.00	440,000.00
Cost of goods sold	43,200.00	35,200.00
Contribution margin	442,800.00	404,800.00
Answer 1 b	Contribution is less when price increased to $ 10 so St. Vincent is earning more money at sell price of $ 9.00.
Answer 2
The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price.
			Change	Chang %
Unit sales	54,000.00	44,000.00	10,000.00	18.52%
Sell price	9.00	10.00	(1.00)	-11.11%
Price elasticity of demand				(1.6667)
Answer 3
Formula for profit maximizing price is-
(1+ Profit-maximizing markup on variable cost)* Variable cost per unit
Profit-maximizing markup on variable cost= -1/(1+PED)
Profit-maximizing markup on variable cost= -1/(1-1.1667)				Because PED is price elasticity of demand i.e. -1.667
Profit-maximizing markup on variable cost= 1.50
Profit maximizing price is (1+ Profit-maximizing markup on variable cost)* Variable cost per unit
Profit maximizing price is (1+ 1.50)* 0.80
Profit maximizing price is (2.50* 0.80)
Profit maximizing price is $ 2.