Suppose a small grocery store was selling 300 units per week of particular SKU priced at $4.50. Further, suppose that this items VCs were $3.60, there were incremental labor costs of $2 to implement a price change on this item, and this item warranted a contributionmargin adjustment for complements of $0.75.

(a) Given this information, use the GBE algorithm (illustrated in Figure 17.7) to calculate the EBE for a 5% price decrease.

(b) If the price elasticity module of the algorithm indicated that the markets price elasticity was 2.0, would the price-increase module be activated or the price-decrease module? Explain your reasoning. (

c) Assuming your answer to Part (b), describe the steps that would be taken by the GBE algorithm to arrive at a profit-maximizing price in this situation.

P test =P current + price change (#1 testing increment) Variable costs ACM = (Ptest-VC) (P current - VC current) Base sales x BS Algorithm for price modification A Fixed costs AFC - (ACM X BS) numerator through use of the Interactions denominator CMtest + $Adj GBE formula BE = numerator / denominator EBE = % BE / % price change Price elasticity E > EBE? no Price-increase module When algorithm is run again, current Price-decrease module yes / Keep decreasing Ptest until E EBE The Ptest before the last increase is P new P new Figure 17.7 7 P test =P current + price change (#1 testing increment) Variable costs ACM = (Ptest-VC) (P current - VC current) Base sales x BS Algorithm for price modification A Fixed costs AFC - (ACM X BS) numerator through use of the Interactions denominator CMtest + $Adj GBE formula BE = numerator / denominator EBE = % BE / % price change Price elasticity E > EBE? no Price-increase module When algorithm is run again, current Price-decrease module yes / Keep decreasing Ptest until E EBE The Ptest before the last increase is P new P new Figure 17.7 7