CVP under uncertainty. (J. Patell) In your new position as supervisor of product introduction, you have to decide on a pricing strategv for a talking-doll specialty product with the following cost structure:

Variable costs per unit S50 Fixed costs S200.000 The dolls are manufactured upon receipt of orders, so the inventor}' levels are insignificant. Your market research assistant is very enthusiastic about probability models and has presented the results of his price analysis in the following form:

a. If vou set the selling price at SI 00 per unit, the probability distribution of total sales is uni- form between S300,000 and S600,000. Under this distribution, there is a 0.50 probability of equaling or exceeding sales of S450,000.

b. If vou lower the selling price to S70 per unit, the distribution remains uniform, but it shifts up to the S600,000 to S900,000 range. Under this distribution, there is a 0.50 proba- bility of equaling or exceeding sales of S750,000.

Selling Price = S100 Selling Price = S70 S300.000 S600,000 Sales S600.000 S900.000 Sales Required 1. This is vour first big contract, and, above all, you want to show an operating income. i ou decide to select the strategy that maximizes the probability of breaking even or earning a positive operating mcome.

a. What is the probability of at least breaking even with a selling price of S10C per unit?1

b. What is the probability of at least breaking even with a selling price of $70 per unit"

2. Your assistant suggests chat maximum expected operating income might be a better objective to pursue. Which pricing strategy would result in the higher expected operating income? (Use the expected dollar sales under each pricing strategy when making expected operating income computations.)