Hanson & Daughters produces a premium label apple juice to wholesalers at a current price of $7 per 5-litre container. Costs for a recent month, in which 100 000 5-litre containers were produced and sold are:

Materials
Labour
Factory overhead
Selling and administration

Total

Variable $10 000 20 000 10 000 10 000 $50 000

Fixed $ 0 40 000 80 000 100 000 $220 000

Hanson & Daughters’ customers are loyal. Recently, a 10% increase in wholesale price resulted in only a 10 per cent decrease in litres sold.

Required

1.     (a) Calculate the price elasticity of demand.

2.     (b) Calculate the profit-maximising price.

3.     (c) Explain why the management of Hanson & Daughters cannot be

certain that another 10 per cent price increase would cause only

another 10 per cent decrease in litres sold.

4.     (d) Provide possible reasons why so many customers were willing to

continue purchasing the apple juice when prices increased by 10

per cent. List as many reasons as you can.

5.     (e) Describe the assumptions underlying the profit-maximising price

you calculated in part (b). How realistic are these assumptions for Hanson & Daughters? What might occur if these assumptions are not met for Hanson & Daughters?

6.     (f) What would you recommend to Hanson & Daughters concerning its price for apple juice? Explain your reasoning.