Requirements 1. If Waterbury prices the motors at $500 eagh, how much operating

Question

Requirements 1. If Waterbury prices the motors at $500 eagh, how much operating income will the company make over the product's life cycle? What is the operating income per unit? 2. Waterbury is concerned about the operating income it will report in the first sales phase. It is considering pricing the motor at $525 for the first 6 months and decreasing the price to $500 thereafter. With this pricing strategy, Waterbury expects to sell 14,500 units instead of 15,000 units in the first 6 months, 20,000 each year over the next 2 years, and 10,000 over the last 6 months. Assuming the same cost structure given in the problem, which pricing strategy would you recommend? Explain. Print Done

Explanation / Answer

It is advise to adopt selling price @ 500 per unit throughout whole life cycle

Product life cycle income statement with $500 as selling price for whole life cycle Particulars First 6 months 6 to 12 13 to 36 37 to 42 Total life cycle Estimated sales                         -            15,000.00            42,000.00          10,000.00 Total sales value @ 500 per unit                         -      7,500,000.00    21,000,000.00    5,000,000.00    33,500,000.00 Variable costs Production                         -      1,275,000.00      2,940,000.00        550,000.00      4,765,000.00 Distribution                         -          135,000.00          252,000.00          50,000.00          437,000.00 Total variable costs      5,202,000.00 Fixed costs Production                         -      1,600,000.00      5,000,000.00        875,000.00      7,475,000.00 Marketing                         -      1,400,000.00      2,360,000.00        525,000.00      4,285,000.00 Distribution                         -          205,000.00          750,000.00        110,000.00      1,065,000.00 Design costs        700,000.00                         -                              -                           -            700,000.00 Total Fixed costs    13,525,000.00 Life cycle income    14,773,000.00 Product life cycle income statement with different selling prices Particulars First 6 months 6 to 12 13 to 36 37 to 42 Total life cycle Estimated sales                         -            14,500.00            40,000.00          10,000.00 Total sales value @ 500 per unit                         -      7,612,500.00    20,000,000.00    5,000,000.00    32,612,500.00 Variable costs Production                         -      1,232,500.00      2,800,000.00        550,000.00      4,582,500.00 Distribution                         -          130,500.00          240,000.00          50,000.00          420,500.00 Total variable costs      5,003,000.00 Fixed costs Production                         -      1,600,000.00      5,000,000.00        875,000.00      7,475,000.00 Marketing                         -      1,400,000.00      2,360,000.00        525,000.00      4,285,000.00 Distribution                         -          205,000.00          750,000.00        110,000.00      1,065,000.00 Design costs        700,000.00                         -                              -                           -            700,000.00 Total Fixed costs    13,525,000.00 Life cycle income    14,084,500.00

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