Determine profit position of the firm

Reference no: EM1370019

Arrow now sells 100,000 silk shirts at $100 each. The material per shirt costs $40 and labor costs are $50 per shirt. The firm has $1.2m. In fixed costs. Price elasticity of demand for such shirts is -4. The firm is considering lowering the price by 20% to $80. At the higher output, labor cost per shirt is expected to drop by 22% and the raw material supplier will offer a 15% discount on materials.

a. What is the profit position of the firm at the moment?

b. Would you advise the firm to cut prices? Why?

Reference no: EM1370019

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