Margin and Profits (Part 2)

Question 1

Target volume (#)

Answer 1

= Fixed costs ($) + Target Profits ($)/ Contribution per unit ($)

Question 2

Target volume (#) (ROS)

Answer 2

= Fixed costs / (Unit selling price –Unit VC)

where Unit VC = original unit VC + ROS*unit selling price

Question 3

Price premium (%)

Answer 3

= Bands price (%) - Benchmarks Price (%) / Benchmark Price ($)

Question 4

Benchmark

Answer 4

All prices in the benchmark will be for equivalent volume of product. (price per liter)

Question 5

Weighted average

Answer 5

= percentage of units per sale(%) * unit selling price ($)

Question 6

Reservation Price`

Answer 6

Also known as the Maximum Willingness to Pay. The highest price that an individual is willing to pay.

Question 7

Linear Demand

Answer 7

Slope = (Q2 - Q1) / (P2 - P1)

Question 8

Maximum Reservation Price

Answer 8

The lowest price that no one is willing to pay

Question 9

Maximum Willingness to buy

Answer 9

The maximum quantity demanded when price = 0

Question 10

Linear demand curve

Answer 10

Q = intercept + slope * P or = MWB - (MWB/MRP) *P

Question 11

Price Elasticity

Answer 11

To understand market sensitivity to changes in price. How much will a change in price affect the demand?

= %Change in Demand / % Change in Price
= (Q2-Q1)/Q1 / (P2-P1)/P1

Question 12

If the market for flowers is very elastic, what does it mean?

Answer 12

Minor price changes have a major impact on demand. The market is very price sensitive

Question 13

If the market for milk is very inelastic, what does it mean?

Answer 13

Minor price changes have little impact on demand. The market is insensitive to rice changes.

Question 14

point elasticity:

Answer 14

a given elasticity applies only to a single point on the linear demand curve.

•In a linear demand function, point elasticity can be used to predict the percentage change in quantity to be expected for any percentage change in price.

Question 15

Constant Price Elasticity

Answer 15

E = ln(Q2/Q1) / ln(P2 / P1)