Gross Profit Rates a Practical Application

question 60

Essay

Gross profit rates a practical application
Note to instructor: The following exercise requires students to use gross profit rates in a manner not specifically illustrated in the chapter.We view this as an exercise in critical thinking and,as such,it is more challenging than the typical exercise.Part d requires an expository answer.Some instructors may choose to omit part d.
Your store sells computers and software.The average computer sells for $1,350,but the customer buying a computer also buys an average of $750 in software.You earn only 10% gross profit rate on sales of computers,but you make a 40% gross profit rate on software.You currently are selling 150 computers per month.
(a)What is the total amount of your monthly gross profit? $________________.
(b)To increase sales,you are thinking about selling computers at cost ($1,215.)This would be the "cheapest price in town," and should attract more customers.You expect each customer who buys a computer to also buy $750 worth of software.Under these assumptions,how many computers must you sell each month in order to earn the same amount of gross profit as you are earning now?
(c)Assume that as a result of reducing the sales price of computers to cost ($1,215),you are able to sell 250 computers each month,and that each customer now buys $850 worth of software.What will be the total amount of your monthly gross profit?
(d)Assume that you achieve the results specified in part c (250 sales transactions per month,including an average of $850 in software).Would you consider the policy of selling computers at cost successful or unsuccessful? Explain specifically why this strategy is working out favorably or unfavorably.

---

Definitions:

Paasche Price Index

The Paasche Price Index measures the change in the price level of a basket of goods and services between two periods, using the quantities of the current period.

Strong Axiom

A principle or rule with robust implications or requirements, though more context is needed for a specific field application.

Revealed Preference

An economic concept referring to the idea that consumers' choices, reflected in their purchasing decisions, reveal their preferences for certain goods or services over others.

Weak Axiom

In economic theory, a principle stating that if a consumer prefers bundle A to bundle B, then they will not prefer B to A when prices change, keeping income constant.