1. Firms A, B, and C were all selling 1000 cups of coffee per day at $3.

50 per cup and they

wanted to experiment with pricing. The table below shows the changes in sales as a result of

their new prices; they made no other changes. Complete the table by calculating the revenue,

cost of goods sold (COGS), and gross margin for each firm.

Ans-

Firm Price per Cup Cups Sold Revenue COGS @0.35 Gross Margin

Baseline $3.50 1000 $3,500.00 $350.00 $3,150.00

A $3.00 1150 $3,450.00 $403.00 $3,047.00

B $4.00 900 $3,600.00 $315.00 $3,285.00

C $2.50 1450 $3,625.00 $508.00 $3,117.00

Total 3500 $10,675.00 $1,226.00 $9,449.00

 
2. Coffee prices are going up, and Firm B is trying to decide whether to pass on to customers a

cost increase of 10¢ per cup—to $0.45 per cup. If raising the price from $4.00 to $4.10 reduces

demand by 2%, should they do it? What if demand goes down by 4%?

Ans- If firm B don’t raise the price of a coffee with the change in COGS

FIRM PRICE PER CUP CUP SOLD REVENUE COGS @0.45 GROSS MARGIN

B $4.00 900 $3,600.00 $405.00 $3,195.00

If firm B raise the coffee price with the change in COGS

FIRM PRICE PER CUP CUP SOLD REVENUE COGS @0.45 GROSS MARGIN

B $4.10 882 $3,616.00 $397.00 $3,219.00

If demand decrease of coffee decrease by 4%

FIRM PRICE PER CUP CUP SOLD REVENUE COGS @0.45 GROSS MARGIN

B $4.10 864 $3,542.00 $389.00 $3,153.00

3. Lowering price does not always increase revenue with increased demand. Besides reducing

price, what else can a firm do to stimulate demand for its product? 

Ans. - A firm can raise their advertising campaign. They can provide discounts to the customers

or offer them exciting voucher packs. If a firm increases their opening hours, this technique can
help them to improve their sales, However, it will expand their budget also. So, there are a lot

more options to enhance the demand for production. A firm might keep well experienced staff,

which will directly improve their sales & service quality.

4. Café X is selling coffee in 3 different sizes at the prices and costs shown in the table below.

They are considering raising the price of their small to $2.75, and they project that sales of

smalls will go down while sales of mediums and larges will go up slightly. Create a spreadsheet

to calculate the projected change in gross margin based on the estimated changes in cups sold.

Be sure to show all intermediate calculations.

Price per Cost per Cups Est. Change in Cups Sold with Small @
Size
Cup Cup Sold $2.75

Small $2.50 $0.20 2,500 -10%

Medium $3.50 $0.35 1,500 +6%

Large $4.50 $0.50 800 +3%

Ans – Current Prices

Price per Cost per Cups Gross

Size Revenue COGS
Cup Cup Sold Margin

Small $2.50 $0.20 2500 $6,250.00 $500.00 $5,750.00

Medium $3.50 $0.35 1500 $5,250.00 $525.00 $4,725.00

Large $4.50 $0.50 800 $3,600.00 $400.00 $3,200.00

Total     4800 $15,100.00 $1,425.00 $13,675.00

After an increase in the price of small cups

Price per Cost per Cups Gross

Size Revenue COGS
Cup Cup Sold Margin

Small $2.75 $0.20 2250 $6,188.00 $450.00 $5,738.00

Medium $3.50 $0.35 1590 $5,565.00 $557.00 $5,008.00

Large $4.50 $0.50 824 $3,708.00 $412.00 $3,296.00

Total     4664 $15,461.00 $1,419.00 $14,042.00

Small Cups = 2500*10/100= -250

Medium Cups = 1500*6/100 = +90

Large Cups = 800*3/100 = +24

Change in Gross Margin = after price changes – before price changes

= $14042 – $13675 = $367 (Profit)