QUANTITY UNIFORM ΤΟTAL MARGINAL VARIA BLE SOLD PRICE ($) REVENUE ($) REVENUE ($) COST ($) 50.00 28 1 48.00 48 48 28 2 46.00 92 44 28 3 45.00 135 43 28 4 44.00 176 41 28 42.00 210 34 28 6 40.00 240 30 28 7 38.31 268 28 28 8 36.50 292 24 28 9 34.50 311 19 28 10 16 28 11 13 28 12 10 28 13 7 28 14 4 28 15 28 16 (1) 28 17 (4) 28 18 (7)
The setting is a Ralph Lauren outlet store, and the product line is Polo golf shirts. A product manager and the General Manager for Outlet Sales are analyzing the discounted price to be offered at the outlet stores. Let’s work through the decision at the level of one color of golf shirts sold per outlet store per day. The decision being made is how low a price to select at the start of any given day to generate sales at that price throughout the day. The demand, revenue, and variable cost information is collected on the following spreadsheet:
Questions
1. Identify the change in total revenue (the marginal revenue) from the fourth shirt per day. What price reduction was necessary to sell four rather than three shirts?
2. Does this fourth shirt earn an operating profit or impose an operating loss? How large is it?
3. What is the change in total revenue from lowering the price to sell seven rather than six shirts in each color each day? In what sense is the decision to sell this seventh shirt a “break point”?
4. Decompose the components of the $28 marginal revenue from the seventh unit sale at $38.31—that is, how much revenue is lost per unit sale relative to the price that would sell six shirts per color per day?
5. Calculate the total revenue for selling the 10th through the 16th shirt per day. Calculate the reduced prices necessary to achieve each of these sales rates.
6. How many unit sales per day most pleases a sales clerk with salescommission- based bonuses?
7. Would you recommend lowering price to the level required to generate 15 unit sales per day? Why or why not? What does it mean to “sell at a negative margin”?
8. At 14 shirts per day, the margin is positive. But what is the operating profit or loss on the 14th? The 12th? The 10th shirt?
9. How many shirts do you recommend selling per color per day? What then is your recommended dollar markup and markup percentage? What dollar margin and percentage margin is that?
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