Aigerim Shakirova Fin-18

CASE ANALYSIS

POLO GOLF SHIRT PRICING

Questions

1. Identify the change in total revenue (the marginal revenue) from the fourth shirt per
day. What price reduction was necessary to sell four rather than three shirts?

MR= △Revenue/△Quantity

MR= (176-135)/(45-44)

MR= $41
Marginal revenue for the fourth shirt is $41 even though its price is $44. Price reduction
is $1 which is from $45 to $44.

2. Does this fourth shirt earn an operating profit or impose an operating loss? How large
is it?

Operating profit= revenue - (operating expenses + cost of goods sold + other day-to-day
expenses)

Operating profit= 176-(28*4)

Operating profit= 176-112

Operative profit= $64

3. What is the change in total revenue from lowering the price to sell seven rather than
six shirts in each color each day? In what sense is the decision to sell this seventh shirt
a “break point”?

△Total revenue= 268-240

△Total revenue= $28

The change in total revenue from selling seventh shirts rather than sixth shirts is $28.
The “break point” of selling a seventh shirt is that Marginal Revenue = Marginal Cost,so
it reaches the Maximum Profit.
Aigerim Shakirova Fin-18

4. Decompose the components of the $28 marginal revenue from the seventh unit sale
at $38.31—that is, how much revenue is lost per unit sale relative to the price that would
sell six shirts per color per day?

Selling the seventh shirt per day at a price of $38.31 required reducing the price from
$40 to $38.31. Total revenue increased from $240 to $268, so revenue increases for
$28. But there would be loss per unit sale relative to the price that would sell six shirts
per color per day.

Loss= 40-38.31
Loss= $1.69 per unit sale

5. Calculate the total revenue for selling the 10th through the 16th shirt per day.
Calculate the reduced prices necessary to achieve each of these sales rates.

Uniform
Q Sold Price($) TR($) MR($) Variable Cost($)
9 34.50 311 19 28
10 32.70 327 16 28
11 30.91 340 13 28
12 29.17 350 10 28
13 27.46 357 7 28
14 25.79 361 4 28
15 24.07 361 0 28
16 22.50 360 -1 28

6. How many unit sales per day most pleases a sales clerk with sales commission-
based bonuses?

The sales clerk force is focused on earning commissions from the product being sold.
So, they would prefer the $24.07 price, where total revenue is $361 selling 15 units of
shirts a day.

7. Would you recommend lowering the price to the level required to generate 15 unit
sales per day? Why or why not? What does it mean to “sell at a negative margin”?

The company should not lower the price to generate 15 sales per day. By lowering the
price, the company loss $59 ($361-($28*15)). This is absolutely not a profit
maximization because MC>MR (28>0).
Aigerim Shakirova Fin-18

8. At 14 shirts per day, the margin is positive. But what is the operating profit or loss on
the 14th? The 12th? The 10th shirt?

The 14th shirt= 361-(28*14) = $31 Operating loss

The 12th shirt= 350-(28*12) = $14 Operating profit

The 10th shirt= 327-(28*10) = $47 Operating profit

9. How many shirts do you recommend selling per color per day? What then is your
recommended dollar markup and markup percentage? What dollar margin and
percentage margin is that?

The firm will get its max profit when MR=MC, which is at 7 shirts with the selling price
$38.31 per shirt. So I recommend selling 7 shirts per color per day.

Dollar markup = (P-VC) = 38.31-28 = $10.31

Percentage markup = (Price/VC)-1 = (38.31/28)-1 = 0.3682 = 36.82%

Percentage margin = Dollar markup/Price = 10.31/38.31 = 0.2691 = 26.91%

Dollar margin = Price margin*Price = 0.2691*38.31 = $10.31