Bronco Jeans distributes its denims direct to retailers. The firm produces and markets a single line of jeans under the brand name Bronco and sells them to retailers at a list price of £8 per pair. Total fixed costs amount to £1000 per week and variable unit costs are £2.00.
Various discounts are given to retailers for bulk purchases and the early settlement of debts. Retailers put a 100% mark-up on the list price + VAT. Demand has been quite strong at the retail level and Bronco has been able to sell 1000 pairs of jeans per week. It wants to expand production and at the same time it feels that because it can sell all it produces, it may be pricing itself too low.
Most of its competitors' jeans are retailing for around £20 a pair, including VAT at 17.5%. In an effort to get some hard data to help it reach a decision, the firm has asked the 250 retail outlets it supplies to estimate the impact on demand that various changes in the list price might have. The answers are summarised in Table.
Question
1. On looking at the results of the survey, the firm feels that it should increase its prices by 20%. Do you think this would be a good idea? Explain your reasons.