6-17 A firm manufactures and sells high quality busi- ness printers and ink tone

Question

6-17 A firm manufactures and sells high quality busi- ness printers and ink toners. Each printer sells for $650 and each toner for $100. The average user keeps the printer for 5 years and consumes 4 toners every year. In response to a recent significant drop in printer sales (which will reduce future toner sales as well) the firm wants to lower the printer price to $500. Assume that income from toner sales occurs at year-end and the firm's cost of capital is 10%. How much of an increase is needed in the toner price to cover the loss in printer price? Contributed by Yasser Alhenawi, University of Evansville

Explanation / Answer

Present value of current total sales revenue (before reducing the printer selling price) = $650+($100*4*PVIFA@10% 5 years) = $650+$400*3.7908 = $650+$1516 = $2166 Reduced selling price of printer = $500 Present value of proposed total sales revenue (after reducing the printer selling price) = $500+(Toner selling price per unit*4*PVIFA@10% 5 years) = $500+ (Toner selling price per unit*4*3.7908) = $2166 $2166-$500 = 15.16315 Toner selling price per unit $1666 = 15.16315 Toner selling price per unit Toner selling price per unit = $1666/15.16315 = $110 $10 is to be increased to cover the loss in printer price

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