Kimio Nakimura owns an ice cream stand that she operates during the summer months in Jackson Hole, Wyoming. Her store caters primarily to tourists passing through town on their way to Yellowstone National Park.
Kimio is unsure of how she should 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 $1.50 and 970 cones were sold. During the second week, she priced the cones at $1.20 and 1,350 cones were sold. The variable cost of a cone is $.40 and consists solely of the costs of the ice cream and of the cone itself. The fixed expenses of the ice cream stand are $508 per week.
1. a.Calculate the net operating income for sale price of $1.50 and $1.20? (Round your intermediate calculations and final answers to 2 decimal places.)
| $1.50 Price | $1.20 Price | |
| Unit sales | 970 | 1,350 |
| Sales | $1,455.00 | $1,620.00 |
| Cost of sales | 388.00 | 540.00 |
| Contribution margin | 1,067.00 | 1,080.00 |
| Fixed expenses | 508.00 | 508.00 |
| Net operating income | 572.00 |
1. b.Did Kimio make more money selling the cones for $1.50 or for $1.20?
2. Estimate the price elasticity of demand for the ice cream cones. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
3. Estimate the profit-maximizing price for ice cream cones. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
We have been provided with the information that Kimio
priced the cones at $1.50 and 970 cones were sold. During the second week, she priced the cones at $1.20 and 1,350 cones were sold. The variable cost of a cone is $.40 and consists solely of the costs of the ice cream and of the cone itself. The fixed expenses of the ice cream stand are $508 per week.
So first of all let us start with the calculating net operating income for sale price of $1.50 and $1.20
| Particular | $ 1.50 Price | $ 1.50 Price |
| Unit sales | 970 | 1350 |
| Sales | $ 1,455 | $ 1,620 |
| Cost of sale | 388
(970*0.40) |
540
(1350*0.40) |
| Contribution Margin | 1,067 | 1,080 |
| Fixed Expenses | 508 | 508 |
| Net operating Income | 559 | 572 |
Answer
1. b.Did Kimio make more money selling the cones for $1.50 or for $1.20?
Answer : Kimio make more money at the selling the cones for $1.20
2. Estimate the price elasticity of demand for the ice cream cones.
Answer : price elasticity of demand for the ice cream cones=
=(1350-970) / (970+1350) / (1.20-1.50) / (1.50+1.20)
= 380/2320 / -0.3/2.7
=0.163 /- 0.074
= – 2.2
3. Estimate the profit-maximizing price for ice cream cones
profit would be ,aximized if price would keep below 1.50
