Firestack Company's management believes that every 5% increase in the selling price of one of the company's products results in a 13% decrease in the product's total unit sales. The variable production cost of this product is $37.50 per unit and the variable selling and administrative cost is $4.30 per unit.
The product's profit-maximizing price according to the formula in the text is closest to:
A) $46.98
B) $49.32
C) $64.34
D) $65.13

Question

Quizplus · Accepted Answer

To find the profit-maximizing price for the product, we need to use the following formula:

P = (V - VC) / (1 + d)

Where P is the profit-maximizing price, V is the unit variable cost (which is the sum of variable production cost and variable selling and administrative cost), VC is the variable production cost, and d is the price elasticity of demand.

So, let's plug in the values:

V = $37.50 + $4.30 = $41.80
VC = $37.50
d = (-13%/5%) = -2.6

P = ($41.80 - $37.50) / (1 - 2.6) = $64.34

Therefore, the profit-maximizing price for Firestack Company's product is $64.34.

Firestack Company's Management Believes That Every 5% Increase in the Selling