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Pricing and Profit Relationships and Break-Even Analysis

Howl Motors is a car dealership located in Moore, OK. The marketing team is having internal discussions about how to price their two main types of selling automobiles, the new sports car and the new SUV. They are looking to set prices in a way that reflects the market, and also to understand which product is more profitable for the firm to help them decide how to allocate internal resources. Howl Motors buys sports cars at a cost of $22,500 each (the unit cost) and marks them up to sell at a profit. They buy their SUVs at $31,000, which they also mark up to sell at profit. Market research has shown that other dealerships in the region are selling the same sports car for as low as $25,000 and as high as $32,500. The same SUV is being sold in the region for anywhere between $37,000 and $44,999.

Last year Howl Motors sold 2,200 sports cars and 1,700 SUVs, and they project unit sales to be the same this year. The owners at Howl Motors have indicated they prefer to price their cars and SUVs on the lower end of the pricing range, utilizing a volume-maximization strategy.

Considering all of these factors, you need to provide an analysis on what Howl motors results will be at different price points.

	Sports Car	SUV
Selling Price	$25,000	$37,000
Quantity Sold	2,200	1,200
Revenue (Price x Quantity)	$55,000,000	$44,400,000
Unit Cost	$22,500	$31,000
Total Cost	$49,500,000	$37,200,000
Profit/Loss (Revenue - Total Cost)	$5,500,000	$7,200,000

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. If both the sports car and the SUV are priced at the low end of the pricing range, which product will generate the highest total profit if unit sales are identical to last year?

SUV

Their profit will be the same

Sports car

Neither, both will lose money

2. If the price of the sports car war was raised to $27,500, which product would generate the highest total profit if unit sales are identical to last year?

Sports car

Their profit will be the same

SUV

Neither, both will lose money

3. If Howl Motors can raise the price of their SUVs to the high end of the range, but lose 10 percent of their unit sales, how much more total profit will they make than if they sold the higher number of units at the low end price? Assume unit costs stay the same. Note: You will need to do some calculations on your own to answer this question.

$6,917,583

$23,798,300

$21,418,470

$11,218,470

4. If Howl Motors can raise the price of their sports cars to the high end of the range, but lose 20 percent of their unit sales, how much more total profit will they make than if they sold the higher number of units at the low end price? Assume unit costs stay the same. Note: You will need to do some calculations on your own to answer this question.

$16,500,000

$12,100,000

$8,040,130

$6,600,000

5. If both products were priced at the low end of the range, how many sports cars would Howl Motors have to sell in order for that product to be as profitable as their SUVs? Assume unit costs stay the same.

3,104

2,313

4,080

4,000

6. If Howl Motors total fixed costs are $5,000,000, what is the break-even point for both sports cars and SUVs at the lowest prices? Recall that the formula for break-even analysis is:

Break-even point = Total fixed costs / (Selling price per unit Cost per unit)

Sports cars:

1,000

833

2,000

500

SUVs:

1,000

2,000

500

833

7. What is the break-even point for sports cars and SUVs at the highest end prices?

Sports cars:

2,000

357

500

1,029

SUVs:

2,000

500

1,029

357