A company estimates monthly demand for a product at different prices as follows: £30: 12,000 units £32: 10,800 units £34: 9,500 units £36: 8,200 units Variable cost is £18 per unit and fixed costs will not change. Which price should be set to maximise profit?

Correct answer: D) £34

Explanation

Because fixed costs do not change, profit is maximised at the price that gives the highest total contribution. £30: (£30 - £18) x 12,000 = £144,000; £32: (£32 - £18) x 10,800 = £151,200; £34: (£34 - £18) x 9,500 = £152,000; £36: (£36 - £18) x 8,200 = £147,600. The highest contribution is at £34. Choosing the price with the highest revenue (£30) ignores variable costs.