Assume you are the CFO of a firm that manufactures electronics. Your firm is about to launch an extremely innovative new product. The product planning team has estimated life cycle sales of the product to be as follows (in thousands):
Year 1 ........ 35,000
Year 2 ........ 75,000
Year 3 ........ 125,000
Year 4 ........ 90,000
Year 5 ........ 15,000
The life cycle average sales price is projected by the product planning team to be $80. The team has recommended to top management and the marketing team that the introductory product price be set at $60.
a. As CFO, what is your reaction to the suggested introductory price of $60 relative to the expected life cycle price of $80?
b. Most of the profit of consumer electronic products is realized early in the product life cycle. How would this fact influence your recommendation about where the price for this product should be set for Year 1?
c. As CFO, are you concerned that a significant portion of the forecasted life cycle volume for this product is assigned to years 3 and 4? Explain.