A price increase with a demand response

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A business initially sells 1,00,000 units at ₹100 each. Variable cost is ₹60 per unit and total fixed operating cost is ₹20,00,000. It tests a 10% price increase, after which unit volume is assumed to fall 20%. Variable cost per unit and fixed cost are unchanged in the base test, with no inventory changes. For a separate sensitivity, variable cost then rises to ₹65 per unit while the tested price and reduced volume remain fixed. Define the magnitude of simple demand elasticity as the percentage volume fall divided by the percentage price increase, each measured from the original base. No taxes or financing costs apply.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

1. Q1What revenue results after the price increase and volume decline?

   • A

     Option A. ₹1,10,00,000

     Why it is wrong: This applies the price increase but keeps original volume.

   • B

     Option B. ₹1,00,00,000

     Why it is wrong: This assumes offsetting percentage changes cancel exactly.

   • C

     Option C. ₹80,00,000

     Why it is wrong: This changes volume but keeps the old price.

   • D

     Option D. ₹88,00,000 — Correct answer

   Answer: D. ₹110 × 80,000 = ₹88,00,000. Revenue is 12% below the original ₹1 crore. Remember: Simultaneous price and volume changes must be multiplied, not simply netted.

   Hint, shown before you answer in practice mode: Use the new ₹110 price and 80,000 units together.

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2. Q2What operating profit remains in the base test with ₹60 variable cost?

   • A

     Option A. ₹17,60,000

     Why it is wrong: This assumes profit changes in direct proportion to revenue.

   • B

     Option B. ₹40,00,000

     Why it is wrong: This is contribution before fixed costs.

   • C

     Option C. ₹20,00,000 — Correct answer

   • D

     Option D. ₹28,00,000

     Why it is wrong: This omits part of the variable cost.

   Answer: C. (₹110 − ₹60) × 80,000 − ₹20,00,000 = ₹20,00,000. This equals original profit despite lower revenue. Remember: Revenue and profit can move differently when unit contribution changes.

   Hint, shown before you answer in practice mode: Use the new unit contribution and the reduced volume, then subtract fixed cost.

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3. Q3What is the magnitude of simple demand elasticity under the specified convention?

   • A

     Option A. 0.50

     Why it is wrong: This reverses the response and price change.

   • B

     Option B. 2 — Correct answer

   • C

     Option C. 10

     Why it is wrong: This is the price-change percentage, not the ratio.

   • D

     Option D. 20

     Why it is wrong: This is the volume-change percentage, not the ratio.

   Answer: B. 20%/10% = 2. This is a case-specific base-percentage calculation, not an arc-elasticity estimate. Remember: State the elasticity convention before interpreting the number.

   Hint, shown before you answer in practice mode: Divide the 20% volume fall by the 10% price increase.

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4. Q4What operating profit results in the separate ₹65 variable-cost sensitivity?

   • A

     Option A. ₹15,00,000

     Why it is wrong: This applies the cost increase to original rather than reduced volume.

   • B

     Option B. ₹36,00,000

     Why it is wrong: This is contribution before fixed cost.

   • C

     Option C. ₹16,00,000 — Correct answer

   • D

     Option D. ₹20,00,000

     Why it is wrong: This leaves unit cost at ₹60.

   Answer: C. (₹110 − ₹65) × 80,000 − ₹20,00,000 = ₹16,00,000. Remember: A small per-unit cost change can materially affect operating profit at scale.

   Hint, shown before you answer in practice mode: Use ₹45 contribution per unit on 80,000 units.

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