PROBLEM 8-1. Determining the Prot-Maximizing Price [LO 1] Spencer Electronics ha

Question

PROBLEM 8-1. Determining the Prot-Maximizing Price [LO 1] Spencer Electronics has just developed a low-end electronic calendar that it plans to sell via a cable channel marketing program.The cable program’s fee for selling the item is 20 percent of revenue.For this fee,the program will sell the calendar over six 10-minute segments in September.

Spencer’s xed costs of producing the calendar are $160,000 per production run.The company plans to wait for all orders to come in,then it will produce exactly the number of units ordered. Production time will be less than three weeks.Variable production costs are $28 per unit.In addition,it will cost approximately $5 per unit to ship the calendars to customers.

Marsha Andersen,a product manager at Spencer,is charged with recommending a price for the item.Based on her experience with similar items,focus group responses,and survey information,she has estimated the number of units that can be sold at various prices:
Price                 Quantity

$85                    15,000

$75                   20,000

$65                   30,000

$55                   45,000

$45                   65,000

Required
a. Calculate expected prot for each price.

b. Which price maximizes company prot?

Explanation / Answer

a. Calculate expected prot for each price.

b. Which price maximizes company prot?

Price $ 65 maximizes company prot

Variable cost Price Quantity Fixed Cost production costs Shipping Cost Marketing Cost Total Variable cost per unit Expected Profit [a] [b] [c] [d] [e] [f = a*20%] [g=d+e+f] [h=(a-g)*b-c] 85 15000 160000 28 5 17 50 365000 75 20000 160000 28 5 15 48 380000 65 30000 160000 28 5 13 46 410000 55 45000 160000 28 5 11 44 335000 45 65000 160000 28 5 9 42 35000

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