SCTI has introduced a new phone so small that it can be carried in a wallet. SCTI invested P400,000.00 in research and development for the technology, and another P800,000 to design and test the prototypes. SCTI predicts a four-year life cycle for this model and gathered this cost data for the wallet phone:

If the price of a wallet phone is P225, SCTI will have to increase the research and development costs by P100,000 and the prototyping costs by P400,000 to improve the model for the higher price. 

Fixed customer service costs also would increase by P500 per month and variable distribution costs would increase by P5 per unit to improve the customer service and distribution at the P225 level.

At the lowest price level of P150, fixed manufacturing costs would be reduced by P5,000 per month because the low price would be the principal selling feature.

What price will produce the most profit for SCTI for the wallet phone's life cycle? (Show solution)

a. Price of 225

b. Price of 150 

c. Price of 180
 

Manufacturing Costs Marketing Costs Customer Costs Distribution Costs Monthly Fixed Costs P25,000 P20,000 P 3,000 P 5,000 Sales Prediction: For price of P150 - average annual sales of 80,000 units. For price of P180 - average annual sales of 60,000 units. For price of P225 - average annual sales of 48,000 units. Variable Costs P20 5 8 15