Polo Golf Shirt Pricing: Solution

The change in the total revenue (Marginal revenue) from the 4th shirt is $41. The price reduction is from the 3rd shirt is $1 (from $45 to $44). The marginal revenue from lowering the price to sell seven rather than six is $28. Selling the seventh shirt per day at a price of $38.31 required a reduction of $1.69 in the price from $40 to $38.31. Although the total revenue increased from by $28 from $240 to $268, a total of $11.83 is lost relative to the price of 6th units sales i.e. $1.69 per unit of sales. This is solved as shown in the above table.

Sales clerk who’s working on sales-commission-based would be most pleased by a sales level at 15 units because it has the maximum total revenue @ $361. Yes, because this is yielding the maximum total profit and beyond this point of sales, marginal profit is starting to be negative which is lowering the total revenue for each marginal unit sold. The marginal operating profit for the 15th shirt is -$28. For the 12th shirt, the marginal operating profit is -$18. For the 10th shirt, the marginal operating profit is -$12. This is found by taking MR and subtracting the variable operating cost of $28. Optimal (profit maximizing) is where MR = MC, which is at 7 shirts at $38.31 per shirt. The optimal markup is a 36.82% markup [$38.31/$28 = 1.3682 or 36.82%]. The dollar markup is $10.31, and the margin = $10.31/$38.31 = 0.26.91 or 26.91%.