Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from the manufacturer.

(a) What is the initial contribution margin?

(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in sales required to maintain its profitability?

(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability?

(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve for the retailer.

(e) Suppose the retailer’s market research team determines that the elasticity of demand for consumers of blenders is – 1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves.

(f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $54?