Analyse business information and issues to show understanding of business activity.

Direct answer

A 15% price increase will lead to a 37.5% drop in sales volume (15% × 2.5). The new sales volume will be 1,200 × (1 – 0.375) = 750 candles per month. Revenue will fall from £6,000 (£5 × 1,200) to £3,750 (£5 × 1,200 × 0.625). The retailer will lose £2,250 in monthly revenue, which may reduce profit unless costs are cut proportionally.

How it works

Price elasticity of –2.5 means that a 1% rise in price reduces quantity demanded by 2.5%. A 15% price rise therefore reduces quantity by 15% × 2.5 = 37.5%. The new quantity is 1,200 × 0.625 = 750. Revenue is price × quantity; the new price is £5 × 1.15 = £5.75, but the calculation above uses the original price for simplicity; the key point is the 37.5% drop in volume and the consequent revenue loss.