Suppose market conditions change and the manufacturer reduces Leo's trade discount from 50% to 40%

Finance Dec 01, 2020

Suppose market conditions change and the manufacturer reduces Leo's trade discount from 50% to 40%. To maintain his same profit margin, what should be his new discount to his customers?

Expert Solution

Solution.>

List Price = $27.95

Trade Discount earlier = 50%

Trade Discount Now = 40%

Discount given to Retail Customers = 25%

If Trade Disc is 50%,

Profit = 75% * 27.95 - 50% * $27.95 = $6.9875

Profit Margin = $6.9875/20.9625 = 33.33%

If Trade Disc is 40%, since profit margin is same;

33.33% = Revenue - 60% * $27.95/Revenue

Revenue/3 = Revenue - 16.77

Revenue = 3*Revenue - 50.31

Revenue = 25.155

Hence discount given to customer is 10%

Note: Give it a thumbs up if it helps! Thanks in advance!

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