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IB Business Management HL 5.5.3 Effects of Price and Cost Changes Questions

Practise HL break-even calculations after price and cost changes, then use the revised figures and case constraints to explain a feasible business response.

Syllabus
First assessment 2024
Course
Business management HL
Level
HL

Exam points

  • Recalculate break-even output after percentage increases in fixed costs and unit variable costs.
  • Calculate margin of safety as sales minus revised break-even output, retaining a negative sign.
  • Calculate sales needed to retain a target profit after a price cut, rounding indivisible units upwards.
  • Explain a price rise using customer loyalty to justify higher revenue and a lower break-even output.
  • Explain how a variable-cost reduction lowers break-even output when permit costs are externally fixed.

IB Business Management HL 5.5.3 Effects of Price and Cost Changes Questions question 1

[Maximum number: 3]

EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that are made from recycled materials using environmentally friendly processes. Dan's customers are 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 bicycles are 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:

Table 1: financial data for Dan's bicycles, for 2015:

The economy is forecasted to grow in the upcoming years. To take advantage of the growth potential, Dan is considering forming a partnership with David Brown, a skilled mechanic who knows how to manufacture bicycles. Both Dan and David would be equal partners and split the profits. The partnership will begin on 1 January 2016 and would trade under a newly created brand, EcoCycle. Recycled materials and environmentally friendly processes would be used to manufacture all the EcoCycle bicycles.

Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:

Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:

Dan, however, conducted primary market research which indicated that respondents were only willing to pay a much lower price for the untested, unknown brand EcoCycle.

Using Table 2, for the new EcoCycle bicycles, for 2016:

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 profit of $20000\$20000.

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