Question
I need help with step by step solutions. Thank you Firm W sells widgets in a reasonably stable market. It plans to launch a new,
I need help with step by step solutions. Thank you
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. W's 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
208,334; 100,000
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, W's
managers estimated that at that price annual sales would be 460,000 units. Calculate expected
sales at $100 and $60 per widget.
174,286; 402,858
(answers can vary because of rounding)
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?
5. Calculate expected annual contribution before marketing for $100 option and $60 option
Answers can vary slightly because of the rounding
$1,857,142.86; $2,334,285.71 (for not rounded demand numbers)
$1,857,150; $2,334,296 (for rounded demand numbers)
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.
$1,607,142.86; $1,984,285.71
7. Bottom line: which targeting choice has better profit potential? Why?
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