Question

Taylor Pennington produces and sells hammocks.
One day during lunch he complained to his friend Steven Green, an economist, that he was having trouble setting prices. When he raised his prices, demand went down as expected, but he could never predict how much demand would change. "I understand my costs quite well," Taylor commented. "I can produce hammocks for $60 each, and I incur $350,000 in fixed costs each year. I think I could manage my business much better if I had a better idea of the demand for hammocks at different prices." Steve said he would take a look at several years' worth of sales data and try to estimate a demand curve for the hammocks. He came up with the following table:


Required

a. What price can be expected to result in the highest operating income?
b. What is the markup on variable cost at the price you selected in part (a)?
c. What is the markup on variable cost when the sales price is $200? $100?
d. What can you conclude about the value of cost-plus pricing compared to pricing based on a demandschedule?


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  • CreatedFebruary 21, 2014
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