Gamex Ltd$.$ manufactures game systems. Gamex has decided to create and market a new system with wireless controls and excellent video graphics. Gamex$$s managers are thinking of calling this system the Yew. Based on past experience they expect the total life cycle of the Yew to be four years, with the design phase taking about a year.

They budget the following costs for the Yew:

Year $1$

$$ R&D costs $($fixed cost$)6,590,000$

$$ Design costs $($fixed cost$)1,450,000$

Year $2$

$$ Production $($fixed cost$)19,560,000$

$$ Production $($variable cost per unit$)50$ per unit

$$ Marketing & Distribution $($fixed cost$)5,242,000$

$$ Marketing & Distribution $($variable cost per unit$)10$ per unit

$$ Customer service $($fixed cost$)2,900,000$

Year $3$

$$ Production $($fixed cost$)19,560,000$

$$ Production $($variable cost per unit$)50$ per unit

$$ Marketing & Distribution $($fixed cost$)5,242,000$

$$ Marketing & Distribution $($variable cost per unit$)10$ per unit

$$ Customer service $($fixed cost$)2,900,000$

Year $4$

$$ Production $($fixed cost$)19,560,000$

$$ Production $($variable cost per unit$)50$ per unit

$$ Marketing & Distribution $($fixed cost$)5,242,000$

$$ Marketing & Distribution $($variable cost per unit$)10$ per unit

$$ Customer service $($fixed cost$)2,900,000$

Questions

$1.$ Suppose the managers at Gamex price the Yew system at $110$ per unit. How many units do they need to sell to break even?

$2.$ The managers at Gamex are thinking of two alternative pricing strategies.

a$.$ Sell the Yew at $110$ from the outset. At this price, they expect to sell $1,500,000$ units over its life cycle.

b$.$ Boost the selling price of the Yew in year $2$ when it first comes out to $240$ per unit. At this price, they expect to sell $100,000$ units in year $2.$ In year $3$ and $4$ drop the price to $110$ per unit. The managers expect to sell $1,200,000$ units in years $3$ and $4.$

c$.$ Which pricing strategy would you recommend? Explain.

$3.$ What other factors should Gamex consider in choosing its pricing strategy?