Question

"You are responsible for setting prices of finished clothing items at a major textile manufacturer. In the past year the price of cotton, a critical input, has increased by 20%. What is the likely result

Answer 1

The Demand of clothing will eventually decrease.

Step-by-step explanation:

The reason is that when the price of a product increases then the demand of the product falls. This fall in product will generate lower level of profits for the company as the major input variable cost has grown by significant (20%) degree. This increase in input cost is not a controlable cost because the market price of input materials are not controlled by the company and hence the negative movements of the input cost will cost the company significant revenue losses.