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# Tennis Products, Inc., produces three models of high-quality

Question # 00578901
Subject: Economics
Due on: 08/26/2017
Posted On: 08/26/2017 08:22 AM

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Page 474 problem 17

Tennis Products, Inc., produces three models of high-quality tennis rackets. The following table contains recent information on th4e sales, costs, and profitability of the three models:

 Model Average Quantity Sold (Units/month) Current Price Total Revenue Variable Cost per unit Contribution margin per unit Contribution Margin A 15,000 \$30 \$450,000 \$15.00 \$15 \$225,000 B 5,000 \$35 \$175,000 \$18.00 \$17 \$85,000 C 10,000 \$45 \$450,000 \$20.00 \$25 \$250,000 Total \$1,075,000 \$560,000

The company is considering lowering the price of Model A to \$27 in an effort to increase the number of units sold. Based on the results of price changes that have been instituted in the past, Tennis Productsâ€™ chief economist has estimated the arc price elasticity of demand to be -2.5. Furthermore, she has estimated the arc cross elasticity of demand between Model A and Model B to be approximately 0.5 and between Model A and Model C to be approximately 0.2. Variable costs per unit are not expected to change over the anticipated changes in volume.

1. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin of Model A. Based on this analysis, should the firm lower the price of Model A?
2. Evaluate the impact of the price cut on the (i) total revenue and (ii) contribution margin for the enter line of tennis rackets. Based on this analysis, should the firm lower the price of Model A?
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#### Tennis Products, Inc., produces three models of high-quality

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Posted On: 08/26/2017 08:22 AM
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