Optical Distortion, Inc. (ODI) is about to introduce its new product: contact lenses for chickens. Unlike contact lenses for humans, which are designed to improve sight, these contact lenses for chickens are designed to distort images so that the chickens become half-blind. This is desirable to poultry farmers because chickens whose vision is impaired will exhibit significantly less fighting (i.e., establishing of a pecking order). This will reduce flock mortality from 25% to 4.5% (each chicken killed through this fighting costs the farmer $2.40).
The typical poultry farm consists of 10,000 to 50,000 birds. Currently, poultry farmers deal with deaths due to fighting by debeaking the chickens. Debeaking reduces flock mortality from 25% to 9% but is so traumatic to the chickens that they stop laying eggs for a week after the operation (a chicken lays an average of five eggs per week and the farmer sells eggs for an average price of $0.53/dozen). Moreover, debeaked chickens have difficulty eating feed from a trough. The resulting spillage causes increased feed costs to the farmer that amount to $0.084 per chicken per year (the normal life span of a chicken is approximately one year).
The ODI lenses do not cause the chickens to become traumatized, and since it enables them to keep their beaks, it does not cause any eating difficulties. A three-person crew, which is able to debeak 250 chickens per hour could, after training, install contact lenses in 225 chickens per hour. The average labor costs for this crew is $36 per hour. ODI’s materials and manufacturing costs are $0.035 per pair of lenses.
ODI is aware that promoting their new product will not be easy. Many poultry farmers consider the idea of contact lenses for chickens to be ridiculous and complain that their workers are unfamiliar with the lens insertion procedure. However, ODI’s immediate question is what price to charge for a pair of lenses.
(a) What is the low end of the price range that ODI should be considering?
(b) What is the high end of the price range that ODI should be considering?
(c) What price within this range should ODI use for its new contact lens product? Justify your answer, making use of what you know about the basic initial-pricing strategies.
(d) Assume the contact lens price that you recommended in Part (c). If first-year fixed costs are $68,000, how many pairs of contacts lenses would ODI have to sell during the first year to breakeven? How does this number affect your confidence in the price you recommended in Part (c)?