Alley Corporation's vice president in charge of marketing believes that every 8% increase in the selling price of one of the company's products would lead to a 13% decrease in the product's total unit sales.The product's absorption costing unit product cost is $17.40.The variable production cost is $4.10 per unit and the variable selling and administrative cost is $4.80 per unit. The product's profit-maximizing price according to the formula in the text is closest to:

Question

Quizplus · Accepted Answer

ε_d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.13))/ln(1 + (+0.08))= -1.81 Profit-maximizing markup on variable cost = -1/(1 + ε_d)= -1/(1 + (-1.81))= 1.23 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)× Variable cost per unit = (1 + 1.23)× ($4.10 + $4.80)= $19.85 (the exact answer, without rounding error, is $19.89)

Alley Corporation's Vice President in Charge of Marketing Believes That