Problem:
Management believes that they can increase the price per hour by 10 percent in this new situation and improve profits by 10 percent, but the sales department cautions that the price increase may decrease sales by 15 percent because they will be higher-priced than the competition (and they are in a highly competitive business, as seen in the business model). Management says that sales will not decrease because in the consulting business, firms do not compete on price but rather on reputation, results achieved, and customer satisfaction. A higher price in the consulting business could imply that they are better than the competition.
Required:
Using our model, what will happen to profits if both of their forecasts are correct? Whose forecast is probably correct? You need to calculate both scenarios-management's price increase with no change in overall sales, and look at profits; and then sales' prediction that total sales will decrease with the price-per-hour increase. Compare the results, and select your answer from the four choices.)
a) sales: profits decrease 22.4 percent
b) management: profits increase 49.2 percent
c) sales: profits increase 5.4 percent
d) management: profits increase 41.5 percen
Solve the problem and show all work.