Question

The Crazy Key Company executives are arguing over the price of the key chain. They want you to help make the decision. Based on the information you found above and the information given below, find the unit contribution and total contribution for the three price options. In addition, decide which price is the best option.

Price Estimated Sale Units
$4.00 1000 units
$5.00 700 units
$6.00 500 units

Suppose Crazy Key Company priced the keys at 55 and aimed to achieve $500 profit in the first month, how many units would they need to sell?

Answer 1

Contribution calculations help decide the best pricing option by comparing total contributions. To find how many units needed for desired profit, unit cost data is necessary. For the WipeOut Ski Company scenario, they incur a loss given the costs; profitability is determined by comparing price to average costs.

Step-by-step explanation:

To assist the Crazy Key Company with making a pricing decision, the unit contribution (UC) and total contribution (TC) can be calculated for each price option. UC is defined as the selling price minus the variable costs per unit, and TC is the UC multiplied by the number of units sold. For pricing at $4.00, $5.00, and $6.00, with estimated sales of 1000, 700, and 500 units respectively, the TC for each price would be these sums: ($4.00-VC) * 1000, ($5.00-VC) * 700, and ($6.00-VC) * 500, where 'VC' stands for variable costs per unit. To determine the best option, compare the TC values - the highest TC indicates the best pricing option assuming the goal is to maximize contribution.

If the Crazy Key Company aims for a $500 profit and sets the price at $5, yet the variable costs are not provided, we cannot calculate the exact number of units needed to meet the profit goal. Generally, the calculation would involve determining the UC first ($5.00-VC) and then using the formula: Required units = (Fixed Costs + Desired Profit) / UC. Without VC, an exact number cannot be provided.

Regarding the WipeOut Ski Company, if it sells 5 units at $25 each, the total revenue (TR) would be 5 units * $25/unit = $125. Assuming total costs (TC) are $130, the company would face a loss of $130 - $125 = $5. To quickly assess profitability, one can compare the selling price to the average cost per unit; if the selling price is higher, the company makes a profit on each unit sold. The marginal unit adds to profits only if its cost is less than the selling price.

For Doggies Paradise Inc., calculating total revenue, marginal revenue, total cost, and marginal cost for each unit level involves detailed financial analysis. The profit-maximizing quantity is where marginal cost equals marginal revenue, and any additional unit would not increase profit.