The accountants at French Perfumery decided to increase the price of a scent called Breezy by10 per cent, from $6 per bottle to $6.60. French Perfumery's accountants expect the 10 per cent price increase to reduce unit sales by 20 per cent. Current sales are 200 000 bottles, and total variable costs are $800 000.
Required:
a. Identify both cost-based and market-based reasons why the accountants raised the price of Breezy.
b. How certain can the accountant be that volume will decline 20 per cent if the selling price increases to $6.60? What effect does this uncertainty have on the accountants' decision to increase the selling price?