Firm W sells widgets in a reasonably stable market. It plans to launch a new, more advanced model and

considers two targeting options: it can go either after a high end market with the price of $100 per

widget or after a lowend market with $60 per widget. We need to advise them which option promises

better profitability.

1. Variable cost per new widget is expected to be either $75 for a high end model or $48 for the

lowend model. Ws fixed costs directly related to manufacturing (excluding marketing) are $2.5

million per year. Calculate the quantity of widgets that W need to sell to break even for $100

option and $60 option (6 points).

2. Current model is sold at $85 per widget. At this price annual sales are estimated at 260,000

units. Observing consumers behavior during sales events when price was dropped to $50, Ws

managers estimated that at that price annual sales would be 460,000 units. Calculate expected

sales at $100 and $60 per widget. (10 points)

3. Which estimate of expected sales is more trustworthy, for $100 or for $60? Why? (2 points)

4. Will W break even selling at $100? At $60? (1 point)

5. Calculate expected annual contribution before marketing for $100 option and $60 option (6

points).

6. With fewer potential customers, marketing to the highend is expected to cost W about

$250,000 a year, compared to $350,000 for a lowend option. Calculate expected contribution

after marketing for $100 option and $60 option (2 points).

7. Bottom line: which targeting choice has better profit potential? Why?(1 point)