Save:
Favorite
Share:
Calculator Allowed: Yes

Question

Answer

Transcription of this question: EcoCycleDan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles thatare made from recycled materials using environmentally friendly processes. Dan’s customersare willing to pay high prices for these types of bicycles, and they have a price inelastic demand.Currently Dan purchases the bicycles from GreenRide, a local manufacturer. GreenRide bicyclesare well made, rarely have defects, and are well known to environmentally conscious cyclists.The income elasticity of demand for Dan’s bicycles is greater than one.Table 1: financial data for Dan’s bicycles, for 2015:Number of bicycles soldSales price per bicycleVariable costs per bicycleFixed costs per year130$1000$650$42 000The economy is forecasted to grow in the upcoming years. To take advantage of the growthpotential, Dan is considering forming a partnership with David Brown, a skilled mechanic whoknows how to manufacture bicycles. Both Dan and David would be equal partners and splitthe profits. The partnership will begin on 1 January 2016 and would trade under a newly createdbrand, EcoCycle. Recycled materials and environmentally friendly processes would be used tomanufacture all the EcoCyc/e bicycles.Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:Number of EcoCycle bicycles soldVariable costs per EcoCycle bicycleFixed costs per year200$300$65 000Dan, however, conducted primary market research which indicated that respondents were onlywilling to pay a much lower price for the untested, unknown brand EcoCycle.(a)(b)(c)(d)(f)Describe one advantage and one disadvantage, for Dan, of using primary marketresearch.Using Table 1, calculate for Dan, for 2015:(i) the break-even number of bicycles (show a’/ your working);(ii) the total profit (show all your working).Explain one benefit for Dan of the income elasticity of demand for his bicycles beinggreater than one.Using Table 2, for the new EcoCycle bicycles, for 2016:(i)[2][2][2][2]calculate the price that Dan must charge to earn a target profit of $20000 (withsales of 200 EcoCyc/e bicycles) (show a/’ your working);using your answer to part (i), and assuming that Dan reduces this price by 5%,calculate the number of bicycles EcoCycle must sell to still have a target profitof $20 000.Explain two reasons why branding of the new EcoCycle bicycles will be important.Examine Dan’s decision to create a partnership with David to manufacture and sellEcoCyc/e bicycles.

Leave a Reply