In 1955 the Boeing Airplane Company was faced with the problem of determining the selling price for the 707 jetliner. The situation in which the company found it- self was rather unusual: it had one competitor-Dou glas Company and its DC-8 t price would be only one variable affecting the de- mand for its aircraft. With a single competitor and very few potential customers, political and financial considerations beyond the control of its operating divisions would assume substantial importance. For instance, United Air Lines hacd chased propeller-type aircraft from Douglas for many years and appeared to be wiling to wait for the DC:8 even though the Boeing 707 was going to be tional first. In light of these factors, it was felt that an attempt to determine timal price on the basis of explicit economic considerations would be useful. an op- rplanes were sufficiently similar and The company realized that the two ai that one firm would have to more or less meet the other's price. If either firm lowered the price, the other would have to follow suit. However, if one raised the price, the other would probably do likewise. Since the Boeing 707 would reach the market earlier than the DC-8, it was believed that Douglas would fol- low the Boeing lead and set a price for its jedliner approximately the same as the Boeing price Boeing had an apparent advantage over Douglas: Its fixed costs were Jower because it had an arrangement with the military to share certain costs. But this same arrangement involved paying a form of rent to the military, thus Boeing's operating costs somewhat higher than those of Douglas. Due to the high initial investment necessary for undertaking production of aircraft, one plausible strategy was to set as high a price as possible in order o reach the break-even date quickly. This attitude met with resistance from the salespeople, who naturally wanted a lower price. It was decided that the primary objective was to maximize profits over the plane's production period. The Boeing Market Research Department estimated the total demand for both planes (007 and DC-8) at several prices. A smooth curve was drawn through the points on the chart, and the mathematical equation for the curve was found to be Total market demand-1,125 + 655 xPrice)-78 (Price where total mazket demand is in number of planes, price is in millions of dollars, and the relationship holds for a price between $4.2 million and $5.4 Based on a detailed study and learning curve experience, Boeing estima the relationship between the total cost of producing planes and the number pro duced. A mathematical formula expressing this relationship is Total Boeing production costs " 50 + 15 (Planes produced) +8 x (Planes produced)s The relationship between the market share and Boeing planes produced (and sold) is Boeing planes produced - Market share x Total market demand Use Excel to do the following 1. The company policy is to round the price of its new planes to the nearest $200,000. Assume different market share percentages of 20 percent to 20 percent in steps of 10 percent, Make a ine chart showing how profe varies with market share and plane price. 2. Based on these results, what price would you recommend that 3. Using your recommended price, at what market share would Boein 4. Tum in written answers to questions 2 and 3, su charge for the plane? Why? break even? beled and professionally out of the worksheet and its formulas. by clearly la- a print- In 1955 the Boeing Airplane Company was faced with the problem of determining the selling price for the 707 jetliner. The situation in which the company found it- self was rather unusual: it had one competitor-Dou glas Company and its DC-8 t price would be only one variable affecting the de- mand for its aircraft. With a single competitor and very few potential customers, political and financial considerations beyond the control of its operating divisions would assume substantial importance. For instance, United Air Lines hacd chased propeller-type aircraft from Douglas for many years and appeared to be wiling to wait for the DC:8 even though the Boeing 707 was going to be tional first. In light of these factors, it was felt that an attempt to determine timal price on the basis of explicit economic considerations would be useful. an op- rplanes were sufficiently similar and The company realized that the two ai that one firm would have to more or less meet the other's price. If either firm lowered the price, the other would have to follow suit. However, if one raised the price, the other would probably do likewise. Since the Boeing 707 would reach the market earlier than the DC-8, it was believed that Douglas would fol- low the Boeing lead and set a price for its jedliner approximately the same as the Boeing price Boeing had an apparent advantage over Douglas: Its fixed costs were Jower because it had an arrangement with the military to share certain costs. But this same arrangement involved paying a form of rent to the military, thus Boeing's operating costs somewhat higher than those of Douglas. Due to the high initial investment necessary for undertaking production of aircraft, one plausible strategy was to set as high a price as possible in order o reach the break-even date quickly. This attitude met with resistance from the salespeople, who naturally wanted a lower price. It was decided that the primary objective was to maximize profits over the plane's production period. The Boeing Market Research Department estimated the total demand for both planes (007 and DC-8) at several prices. A smooth curve was drawn through the points on the chart, and the mathematical equation for the curve was found to be Total market demand-1,125 + 655 xPrice)-78 (Price where total mazket demand is in number of planes, price is in millions of dollars, and the relationship holds for a price between $4.2 million and $5.4 Based on a detailed study and learning curve experience, Boeing estima the relationship between the total cost of producing planes and the number pro duced. A mathematical formula expressing this relationship is Total Boeing production costs " 50 + 15 (Planes produced) +8 x (Planes produced)s The relationship between the market share and Boeing planes produced (and sold) is Boeing planes produced - Market share x Total market demand Use Excel to do the following 1. The company policy is to round the price of its new planes to the nearest $200,000. Assume different market share percentages of 20 percent to 20 percent in steps of 10 percent, Make a ine chart showing how profe varies with market share and plane price. 2. Based on these results, what price would you recommend that 3. Using your recommended price, at what market share would Boein 4. Tum in written answers to questions 2 and 3, su charge for the plane? Why? break even? beled and professionally out of the worksheet and its formulas. by clearly la- a print