Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week.

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $5.00 and 2,240 cones were sold. During the second week, she priced the cones at $5.50 and 1,800 cones were sold. The variable cost of a cone is $1.10 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,035 per week.

Required:

1. What profit did Maria earn during the first week when her price was $5.00?

2. At the start of the second week, Maria increased her selling price by what percentage? What percentage did unit sales decrease? (Round your percentage answers to 2 decimal place.)

3. What profit did Maria earn during the second week when her price was $5.50?

4. What was Maria's increase (decrease) in profits from the first week to the second week?

Explanation

1.

Maria’s profit during the first week is computed as follows:

Profit	= (P – V) × Q − Fixed expenses
Profit	= ($5.00 − $1.10) × 2,240 − $2,035
Profit	= $3.90 × 2,240 − $2,035
Profit	= $8,736 − $2,035
Profit	= $6,701

2.

The percentage increase in the selling price and the percentage decrease in unit sales are computed as follows:

	Price			Volume
Revised price/volume	$	5.50		1,800
Original price/volume (a)		5.00		2,240
Change (b)	$	0.50		(440	)
Percentage increase/(decrease) (b) ÷ (a)		10.00	%	(19.64	)%

3.

Maria’s profit during the second week is computed as follows:

Profit	= (P – V) × Q − Fixed expenses
Profit	= ($5.50 − $1.10) × 1,800 − $2,035
Profit	= $4.40 × 1,800 − $2,035
Profit	= $7,920 − $2,035
Profit	= $5,885

4.

The decrease in profits is computed as follows:

Net operating income in the second week	$	5,885
Net operating income in the first week		6,701
Decrease in net operating income	$	(816	)

Thanks