Tennis Products Corporation produces three models of high-quality tennis rackets. The following table contains recent information on the sales, costs, and profitability of the three models:
Tennis Products Corporation produces three models of high-quality tennis rackets. The following table contains recent information on the sales, costs, and profitability of the three models:
| MODEL | AVERAGE QUANTITY SOLD (UNITS/MONTH) | CURRENT |
TOTAL REVENUE ($) | VARIABLE COST PER UNIT ($) | CONTRIBUTION MARGIN PER UNIT ($) | CONTRIBUTION MARGIN ($) * |
| A | 15,000 | $30 | $450,000 | $15.00 | $15 | $225,000 |
| B | 5,000 | $35 | $175,000 | $18.00 | $17 | $85,000 |
| C | 10,000 | $45 | $450,000 | $20.00 | $25 | $250,000 |
| Total | $1,075,000 | $560,000 |
*Contribution to fixed costs and profits.
The company is considering lowering the price of Model A to $27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Products’ chief economist estimates the arc price elasticity of
Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin for the entire line of tennis rackets and based on this analysis, should the firm lower the price of Model A? Explain
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