In late September 2019, Apple Inc. announced that it would be releasing three new models of its iPhone in the fourth quarter of 2019: the iPhone X, the iPhone 8 Plus, and the iPhone 8. In addition, it would continue to sell some of the older models.

To follow is a table containing price and cost estimates for the current three new iPhone models plus one older model. The estimated direct materials costs were developed by Other listed costs and data are assumptions.

iPhone X

iPhone 8 Plus

iPhone 8

iPhone 7

Sales price (base models)

$ 999

$ 799

$ 699

$ 649

Estimated direct materials (from IHS Markit and Susquehanna International Group)

581

288

248

248

Estimated direct labor (assembly and testing)

8

5

5

5

Estimated retail packaging and shipping to warehouses/stores)

5

4

4

4

Total variable costs

594

297

257

257

Contribution margin per phone

$ 405

$ 502

$ 442

$ 392

Minutes of skilled labor required for assembly

7

5

4

3

Questions

Which iPhone model is the most profitable for Apple? Which metric are you using to gauge profitability? Defend your choice of metric.

Assume that Apple has unlimited demand for every iPhone model. Which model should it emphasize to maximize profits if skilled labor is a scarce resource?

Why might Apple offer several iPhone models rather than just the one most profitable model?