Q1. a. A manufacturer sells a product at a price of $50; variable costs are now $32 per unit. If volume increases next year, certain economies of scale will occur and variable costs may be lowered to $28 per unit. On the other hand, if the recession deepens and sales fall off, some economies of scale currently realized will be lost and variable costs could increase to $36. Use a One-Input Data Table to the effect on unit gross margin of variations in variable costs between $28 and $36 (at $ .20 increments).
b. Use a One-Input Data Table to examine additionally how the unit gross margin % on selling price and the unit gross margin % on cost will vary under the same conditions.
c. In addition to variations in variable costs, the manufacturer is also considering some price changes. In order to stimulate demand, price may be dropped as much as $5 per unit. On the other hand, if the market research department reports that demand is inelastic, price may be increased to $55 per unit. Use a Two-Input Data Table to evaluate the effects on unit gross margin of variations in variable costs (part b) combined with variations in price (at $ .50 increments).
Q2. a. Zephyr Chemicals currently holds a 30% share of the market for industrial chemicals. Industry experts estimate the total market in the year 2008 to be $200 million. Zephyr's gross margin is 25%. Examine the sensitivity of Zephyr's gross profits in 2009 to variations in industry growth rates ranging from -2% to 7% (at 1% increments)?
b. Just as industry growth rates may vary, Zephyr's market share could go as high as 36% in 2009. Examine the simultaneous effects on gross profits of varying industry growth rates and 1/2 % increments in Zephyr's market share.