The Michael Scott Paper Company sells 100,000 units at $7 per unit each year to
ID: 393789 • Letter: T
Question
The Michael Scott Paper Company sells 100,000 units at $7
per unit each year to break even. Unit Variable Cost is $4.
• Due to competition, Michael is considering a $1 price cut (i.e.,
$6 instead of $7) and publicize this information with an
advertisement which costs $8,000
• 1. How many more units sales are required to break even?
• A 54K
• B 540K
• C 55K
• D 550K
2
Q1: Break-even Analysis
• 2. Suppose the advertisement will increase the demand (unit
sales) by 30%, will the company be able to break even?
• A No
• B Yes
• 3. If not, what is the lowest price to set?
• A $6.37
• B $6.76
• C $6.95
• D $7.04
3
Q2: Price Elasticity
• There are two competing orange juice brands available on
market
• Tropicana has a demand (unit sales) function
• = 120 5 + 2
• Minute Maid has a demand (unit sales) function
• = 120 7 + 2
• and are demand (unit sales) for each brand
• and are prices for each brand
• Tropicana is priced at $3 and Minute Maid is priced at $2
4
Q2: Price Elasticity
• Please compute the own price elasticity and cross price
elasticity of both brands respectively. Please choose one from
the following choices for Question 4-7
• A -0.14
• B 0.0367
• C -0.13
• D 0.0536
• 4. :
• 5. :
• 6. :
• 7. :
5
Q2: Price Elasticity
• 8. If Tropicana CUTS its price by 1%, Tropicana’s unit sales will
• A increase by 0.14%
• B decrease by 0.14%
• C increase by 0.05%
• D decrease by 0.05%
• 9. If Tropicana CUTS its price by 1%, Minute Maid’s unit sales
will
• A increase by 0.14%
• B decrease by 0.14%
• C increase by 0.05%
• D decrease by 0.05%
Explanation / Answer
Answering the first question as per Chegg Policy
Answer 1 : Option A = 54k
Explanation: Given that, No of Units sold = 100,000 units
Selling price = SP = $7, Variable Cost = VC = $4
Profit = 0, Let Fixed Cost = F
In Break Even, Total Revenue = Total Cost
100,000 x 7 = 100,000 x 4 + F
F = $300,000 = Fixed Cost
Now, when the Company is considering a price cut of $1, SP = $6
Additional advertisement cost = $8000
Let total units produced = K
To Break even, Total revenue = Total cost
K x 6 = (K x 4) + 300,000 + 8,000
2K = 308000
K = 154000 Units
So, the company has to produce (154000 – 100000) = 54000 more units (OPTION A)