Covington Motors, a car dealership, specializes in the sales of sport utility ve
ID: 364334 • Letter: C
Question
Covington Motors, a car dealership, specializes in the sales of sport utility vehicles (SUVs) and station wagons. Due to its reputation for quality and service, Covington has a strong position in the regional market, but demand is somewhat sensitive to price. After examining the new models, Covington’s marketing consultant has come up with the following demand curves:
SUV demand = 400 – 0.014 * SUV price
Wagon demand = 425 – 0.018 * wagon price
The dealership’s unit costs are $17,000 for SUVs and $14,000 for wagons. Each SUV requires 2 hours of preparation labor, and each wagon requires 3 hours of preparation labor. The current staff can supply 320 hours of labor.
(a) Determine the profit-maximizing prices for SUVs and wagons.
(b) What demand levels will result from the prices in part a?
Explanation / Answer
a Since the constraint that we have is of 320 labor hrs So in 320 labor hrs No of SUV's produced 160 Assuming no wagon No of wagons produced 106.67 Assuming no SUV Using above figures and the formula given in the question let us calculate the respective prices SUV price 17,142.9 using the formula - SUV price = (400-SUV demand)/0.014 Wagon price 17,685.2 using the formula - Wagon price = (425- wagon demand)/0.018 Now let us see which is the profit maximising one out of the two Total profit SUV 22,857.14 Using the formula SUV produced*(Price-cost) Total profit Wagon 3,93,086.42 Using the formula Wagon produced*(Price-cost) As we can see that profit of producing wagons is more than SUV So only wagon should be stationed Wagon price 17,685.19 b Wagon demand 106.67