Question

In the last quarter, IM sold 2243 units of sweet sticks at a unit cost of $20. Each of the sweet sticks

were priced at $66, on average. The CMO is considering a price change to $61 each and has asked the
marketing analysts to compute the change in sales revenue. Traditionally, the products of ICM have
exhibited an elasticity of -0.67.
Compute the $ change in profitability of ICM.
a. $-56253
b. $-7784
c. $-8569
d. $-4840
e. $-6541

Answer 1

The change in profitability for IM is -$41324.05.

Step-by-step explanation:

To compute the change in profitability, we need to calculate the change in sales revenue and subtract the change in costs. The change in sales revenue can be calculated by multiplying the change in quantity sold by the change in price. In this case, the change in quantity sold is the difference between the new and old quantity sold, which is 2243 - (2243 * (-0.67)) = 2243 * (1 + 0.67) = 3778.81 units. The change in price is $61 - $66 = -$5.

Therefore, the change in sales revenue is 3778.81 * -$5 = -$18894.05. Now, we need to calculate the change in costs. The unit cost is given as $20, so the change in costs is 2243 * ($20 - $5) = $22430. Finally, we can calculate the change in profitability by subtracting the change in costs from the change in sales revenue: -$18894.05 - $22430 = - $41324.05.

Therefore, the change in profitability for IM is -$41324.05.