Problem 4 (6 points) Benny Corporation developed a software product. Sales have

Question

Problem 4 (6 points) Benny Corporation developed a software product. Sales have been good at 50,000 units a month, but the company has been losing money as shown below: 1,250,000 300,000 950,000 960,000 S10000) Sales (50,000 units x $25 per unit) Variable cost (50,000 units x $6 per unit) Contribution margin Fixed expenses Net operating loss The company's variable cost is the $6 fee it pays to another company to produce the software for download Monthlyfixed selling and administrative expenses are $960,000 The company's marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price would yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company's owners concerning the pricing issue Required: Show all work. (3 points each; total 6 points) 1. Given the data provided by the Benny Corporation marketing manager, what price do you recommend that Benny Corporation charge to maximize its profits assuming that the company considers the price elasticity of demand when determining its product prices? To answer this question, first calculate the price elasticity of demand. Then, compute the price 2. The owners have invested $2,700,000 in the company and feel that they should be earning at least 2% per month on their investment before taxes. Suppose your recommended selling price would result in projected sales of 85,000 units per month. Would the owner's objective be achieved? Explain why or why not and what the target selling price would have to be to achieve the owner's objective if your recommended price per unit would not generate sufficient operating income before taxes.

Explanation / Answer

Other questions are asked in other forum 1. Computation of price and unit Particulars Amount Decrease of 5% price = 25*95% 23.75 22.5625 21.43438 20.36266 19.34452 18.3773 17.45843 16.58551 Sale unit = 50000*108%= 54000 54000 58320 62985.6 68024.45 73466.4 79343.72 85691.21 92546.51 Sales (50,000 * $25) 1250000 Sales (54000 *23.75) 1282500 1315845 1350057 1385158 1421173 1458123 1496034 1534931 Variable cost (50,000*$6) 300000 Variable cost (54000* $6) 324000 349920 377913.6 408146.7 440798.4 476062.3 514147.3 555279.1 Contribution margin 950000 Contribution margin 958500 965925 972143.4 977011.8 980374.1 982060.8 981887 979652.1 Fixed expenses 960000 Fixed expenses 960000 960000 960000 960000 960000 960000 960000 960000 profit -10000 profit -1500 5925 12143.37 17011.76 20374.15 22060.76 21886.98 19652.08 So at selling price at $18.3773 and unit sale per month is 79343 unit is the best option. After that profit starts reducing. 2. Investment is @2,700,000 and earning expectation is 2% = 2,700,000 *2% = 54000 The maximum selling will be $18.3773 and unit sale 79343 and maximum earning will be 22,060, so owner objective can not meet.

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