Problem: Optimal Markup. Jerry Jones is a managing partner of Camden & Associates, Inc., a New York based management-consulting firm. Jones has asked you to complete an analysis of profit margins for Norton Inc., a client firm. Unfortunately, your predecessor on this project was abruptly transferred, leaving only sketchy information on the client’s pricing practices.
A) Use the available data to complete the following table:
Price Marginal cost Mark up on cost Mark up on price
$1 $0.50 100% 50%
2 1.60 - -
5 - 400 -
10 - - 25
- 15.00 66.7 -
B) Calculate the optimal markup cost and optimal markup price for each product, based on the following estimates of the point price elasticity of demand:
Product Price Optimal Markup Optimal Markup
Elasticity of on Cost, MOC* on Price, MOP*
Demand
A -1.5
B -2.0
C -2.5
D -5.0
E -10.0