The manager of Calypso, Inc. is considering raising its current price of $30 per unit by 10%. If she does so, she estimates that demand will decrease by 20,000 units per month. Calypso currently sells 50,000 units per month, each of which costs $25 in variable costs. Fixed costs are $180,000. Assume the manager does not know how much demand will drop if the price increases. By how much would demand have to drop before the manager would not want to implement the price increase?

With a proposed increase in price of 10%, Calypso would like break-even, that to ensure that its total revenue covers its total fixed costs. . This would mean the minimum quantity should be that which will produce a total contribution that covers the total fixed cost. And would produce a profit of zero.

New selling price after 10% Increase = 110% × $30 = $33

Minimum quantity = Total fixed / contribution per unit

Contribution per unit = selling price - variable cost per unit

= $33 - $25

= $8 per unit

Minimum quantity = Total fixed cost/contribution per unit

= 180,000/ 8

= 22,500 units

The decrease in demand = Current quantity - minimum quantity

= 50,000 - 22,500

= 27,500 units

Demand would have to drop by 27,500 units and above

marvineetesh3 marvineetesh3 · Answer 2 · 2022-04-18T13:14:26+02:00

Demand would have to drop by 27,500 units and above, before the manager would not want to implement the price increase.

What is demand?

The quantity of a good that consumers are willing and able to acquire at various prices during a certain period of time is known as demand.

The demand curve is the relationship between price and quantity demand. Calypso would like to break-even with a planned price increase of 10%, ensuring that its total revenue meets its whole fixed costs.

As a result, the minimal quantity should be that which will result in a total contribution equal to the whole fixed cost. And would result in a loss of zero.

Computation of change in demand:

After a 10% increase, a new selling price has been established:

[tex]110\% \times \$30 = \$33[/tex]

Then, Contribution per unit is:

[tex]\text{Contribution Per Unit} = \text{Selling Price - Variable Cost Per Unit}\\\\\text{Contribution Per Unit} = \$33 - \$25\\\\\text{Contribution Per Unit} = \$8 \text{Per Unit}[/tex]

Now, the Minimum quantity is:

[tex]\text{Minimum Quantity} = \dfrac{\text{Total Fixed}}{{\text{Contribution Per Unit}}}\\\\\\\text{Minimum Quantity} = \dfrac{180,000}{8}\\\\\text{Minimum Quantity} = 22,500 \text{Units}[/tex]

Then, The decrease in demand is:

[tex]\text{Decrease in Demand} = \text{Current Quantity - Minimum Quantity}\\\\\text{Decrease in Demand} =50,000 - 22,500\\\\\text{Decrease in Demand} = 27,500 \text{units}[/tex]

Therefore, Demand would have to drop by 27,500 units and above.

Learn more about demand, refer to:

https://brainly.com/question/14456267