Case Study

CASE STUDIES
1. Over the past year Meredith and Smunt Manufacturing had annual sales of 10,000 portable
water pumps. The average quarterly sales for the past 5 years have averaged: spring 4,000,
summer 3,000, fall 2,000 and winter 1,000. Compute the quarterly index
Solution: Sales of 10,000 units annually divided equally over the 4 seasons is
10,000 / 4  2,500 and
The seasonal index for each quarter is:
spring 4,000 / 2,500  1.6;
summer 3,000 / 2,500  1.2; fall 2,000 / 2,500 .8;

winter 1,000 / 2,500 .4.
2. Using the data in Problem 7, Meredith and Smunt Manufacturing expects

sales of pumps to grow by 10% next year. Compute next year’s sales and the
sales for each quarter.
Solution: Next years sales should be 11,000 pumps (10,000 *110. 11,000). Sales for
each quarter should be 1/4 of the annual sales * the quarterly index.
Spring = (11,000 / 4)*1.6 = 4,400;
Summer = (11,000 / 4)*1.2 = 3,300;
Fall = (11,000 / 4)*.8 = 2,200;
Winter = (11,000 / 4)*.4.=1,100.
3. Let us take an example. If the price of coffee rises from Rs. 45 per 250
grams to Rs. 55 per 250 grams per pack and as a result the consumer’s
demand for tea increases from 600 to 800 packs then the cross elasticity
of demand of tea for coffee can be found out as follows
Solution:
∆qx = 800 – 600 = 200 packs
∆py – Rs. 55-45 = 10
4.Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and
decides that she can charge more. She raises the price to $6 a dozen and sells
40 dozen. What is the elasticity of demand? Assuming that the elasticity of
demand is constant, how many would she sell if the price were $10 a box?
Solution:
To find the elasticity of demand, we need to divide the percent change
in quantity by the percent change in price.
% Change in Quantity = (40 - 50)/(50) = -0.20 = -20%

% Change in Price = (6.00 - 4.00)/(4.00) = 0.50 =
50% Elasticity = |(-20%)/(50%)| = |-0.4| = 0.4
The elasticity of demand is 0.4 (elastic).
5.If Neil's elasticity of demand for hot dogs is constantly 0.9, and he buys 4 hot
dogs when the price is $1.50 per hot dog, how many will he buy when the
price is $1.00 per hot dog?
Solution:
This time, we are using elasticity to find quantity, instead of the other
way around. We will use the same formula, plug in what we know, and solve
from there.
Elasticity =
And, in the case of John, %Change in Quantity = (X – 4)/4
UNIT-5: INFLATION & BUSINESS CYCLES BALAJI INST OF IT & MANAGEMENT

Therefore :
Elasticity = 0.9 = |((X – 4)/4)/(% Change in Price)|
% Change in Price = (1.00 - 1.50)/(1.50) =
-33% 0.9 = |(X – 4)/4)/(-33%)|
|((X - 4)/4)| =
0.3 0.3 = (X -
4)/4 X=5.2
Since Neil probably can't buy fractions of hot dogs, it looks like he will buy 5
hot dogs when the price drops to $1.00 per hot dog.
6. Yesterday, the price of envelopes was $3 a box, and Julie was willing to buy
10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now
willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic?
What is Julie's elasticity of demand?
Solution:
To find Julie's elasticity of demand, we need to divide the percent change
in quantity by the percent change in price.
% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%

% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 =
25% Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8
Her elasticity of demand is the absolute value of -0.8, or 0.8. Julie's elasticity of
demand is inelastic, since it is less than 1.
7. Let us take an example. If the price of coffee rises from Rs. 45 per 250
grams to Rs. 55 per 250 grams per pack and as a result the consumer’s
demand for tea increases from 600 to 800 packs then the cross elasticity of
demand of tea for coffee can be found out as follows:
Solution:
∆qx = 800 – 600 = 200 packs
∆py – Rs. 55-45 = 10
8.Suppose the following demand function-for coffee in terms of price of tea is

given. Find out the cross elasticity of demand when price of tea rises from Rs.
50 per 250 grams pack to Rs. 55 per 250 grams pack. Qc = 100 + 2.5Pt Where
Qc is the quantity demanded of coffee in terms of packs of 250 grams and Pt is
the price of tea.
Solution:
The positive sign of the derivative of Pt shows that rise in price of tea will cause an
increase in quantity demanded of coffee. This implies that tea and coffee are
substitutes.
In order to determine cross elasticity of demand between tea and coffee, we first
find out quantity demanded of coffee when price of tea is Rs. 50 per 250 grams.
Thus,
Qc= 100 + 2.5 x 50 = 225

Cross elasticity, e. = dQc/dPt x Pt/Qc
dQc/dPt = 2.5
ec =2.5 x 50/225 = 125/225 = 0.51
9. Two goods have a cross-price elasticity of demand of +1.2 (a) Would you
describe the goods as substitutes or complements? (b) If the price of one of the
goods rises by 5 per cent, what will happen to the demand for the other good,
holding other factors constant?
Solution:
(a) The goods with positive cross-price elasticity of demand are substitute goods.
(b) If the price of one of the two goods increases by 5 per cent, it will be substi-
tuted by the other good so that the quantity demanded of this other good will rise.
With positive cross-price elasticity being equal to 1.2, the quantity demanded of
the other good will increase by 1.2 x 5 = 6 per cent.
10. From the following data, you are required to calculate:

(a) P/V ratio
(b) Break-even sales with the help of P/V ratio.
(c) Sales required to earn a profit of Rs. 4,50,000
Solution:
Fixed Expenses = Rs. 90,000
Variable Cost per unit:

Direct Material = Rs. 5
Direct Labour = Rs. 2
Direct Overheads = 100% of Direct Labour
Selling Price per unit = Rs. 12.
11. From the following particulars, find out the break-even-point:
Variable Cost Per Unit Rs 15
Fixed Expenses Rs 54000
Selling Price per Unit Rs 20
What should be the selling price per unit, if the break-even point should be brought down to
6,000 units?
12.The fixed costs amount to Rs. 50,000 and the percentage of variable costs to sales is given to
be 66 ⅔%.If 100% capacity sales are Rs. 3,00,000, find out the break-even point and the
percentage sales when it occurred. Determine profit at 80% capacity:
Solution:
13. From the following information, ascertain by how much the value of sales must be increased
by the company to break-even
Sales Rs 3,00,000
Fixed Cost Rs 1,50,000
Varible Cost Rs 2,00,000
Solution:

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CASE STUDIES

The seasonal index for each quarter is:

spring 4,000 / 2,500  1.6;

summer 3,000 / 2,500  1.2; fall 2,000 / 2,500 .8;

2. Using the data in Problem 7, Meredith and Smunt Manufacturing expects

Spring = (11,000 / 4)*1.6 = 4,400;

Summer = (11,000 / 4)*1.2 = 3,300;

Fall = (11,000 / 4)*.8 = 2,200;

Winter = (11,000 / 4)*.4.=1,100.

% Change in Quantity = (40 - 50)/(50) = -0.20 = -20%

The elasticity of demand is 0.4 (elastic).

UNIT-5: INFLATION & BUSINESS CYCLES BALAJI INST OF IT & MANAGEMENT

% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%

8.Suppose the following demand function-for coffee in terms of price of tea is

Qc= 100 + 2.5 x 50 = 225

10. From the following data, you are required to calculate:

Variable Cost per unit:

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