1. How much would Calibrated’s weekly profits increase if it expanded to meet
the entire amount of its current excess demand?
If Calibrated decides to expand operations in order to meet demand then they will have
a negative weekly profit margin if they don’t increase the selling price. Fixed cost will
increase by $12,000 to purchase the equipment required to build the increase of 4,000
units. Labor cost would increase by $10,000 to hire the new under skilled workers.
Sales Rev:
$200,000
Var. Cost:
$110,000
Fixed Cost: $ 92,000
Pretax Profit: -$2,000
2. Prepare an analysis of a 10% price increase
Calculate the break-even sales quantity (percent and units)
They would need to sell 909 less units to break even at the new price of
$22 and 10,000 units.
Calculate the new $ contribution margin per unit
$22-$5= $17
3.
What risks might be to Calibrated of increasing price to maximize profit?
They have the potential to lose customers by increasing their price which could result in
a net loses if they don’t sell enough units to break even. Prices tend to drive sales. If
the prices are too high, even loyal customers may tend to look for other companies to
conduct business with.
4. What risks might there be to Calibrated of expanding output rather than
reducing demand through a price increase?
A competitor could enter the market charging less then Calibrated and potentially taking
some of their customers resulting in selling fewer units and ultimately making the
expansion a poor judgment on management’s part.
