Question #3 (35 points)

Adelais Inc. sells brand A. The variable cost per unit is $16, and the contribution margin is 20%. The fixed costs are $4,000,000 a year.

The size of market where brand A is sold is 20,000,000 units. Currently A sells 3,000,000 units. The variable costs change based on the sales volume. If the sales are less or equal to 2,800,000 units, the variable cost per unit is $16. If the sales are between 2,800,001 and 5,000,000 units, the variable cost per unit is $15. If the sales go above 5,000,000 units, the variable cost per unit drops to $14.

3.1 (5 points)

What is the BEP in units?

What is the necessary market share for A to break even?

What is the profit?

3.2 (10 points)

Adelais is considering two different strategies. In the first one, they want to hire 4 salespeople. Each one will receive a salary of $50,000 a year. They will also get paid with a commission of 15% of sales. The sales are expected to increase by 50%.

What is the new BEP in units?

What is the annual profit?

3.3(20 points)

The second strategy: Instead of hiring 4 salespeople, the managers of Adelais are considering a 20% price cut. The price-demand elasticity E = - 4.0. [Reminder: E = (% change in demand)/(% of change in price)].

What is the profit?

What is the new BEP in units?

If the price-demand elasticity was unknown, calculate how high it should be in order to generate the same profits as in the case without the price cut