Reference no: EM133064770

Question - An entity has a market-based pricing structure that is based on the quantity demanded. The entity's policy is to always keep total cost of the product at 80% of market price. The entity uses the traditional costing system to establish cost. The budgeted overheads for the period were estimated at $7,500,000. Meanwhile, the budgeted activity level is expected to be 375,000 direct labour hours.

Information relating to the total cost of the product at different demand levels are shown below:

Demand in quantity (units) 2,500 3,000

Direct material 375,000 450,000

Direct labour ($50 per hour) 1,200,000 1,500,000

Direct expense 675,000 900,000

Fixed selling expense 4,500,000 4,500,000

Required -

(a) Determine the straight-line demand/price equation based on the selling prices and quantity demanded.

(b) Using the equation to predict quantity demanded when selling price is $4,617.50.

(c) Explain briefly the concept of price elasticity of demand and discuss briefly how it impacts pricing decisions.