Wendel stove company is developing a \"professional\" model stove aimed at the h

Question

Wendel stove company is developing a "professional" model stove aimed at the home market. The company estimates that variable costs will be $2,000 per unit and fixed costs will be $10,000,000 per year.
a. suppose the company wants to set its price equal to full cost plus 30%. To determine cost, the company must estimate the # of units it will produce and sell in a year. Suppose the company estimates that it can sell 5,000 units. What price will the company set?
b. What is "odd" about setting the price based on an estimate of how many units will be sold?
c. Suppose the company sets a price as in part a, but the # of units demanded at that price turns out to be 4,000. Revise the price in light of demand for 4,000 units.
d. What will happen to the # of units that will be sold if the price is raised to the one you calcuated in part c?
e. Explainwhy setting price by marking up cost is inherently circular for a manufacturing firm.

Explanation / Answer

A. $2,600 B. What if they don't sell their estimated amount? C. If they sell 4,000 units at the $2,600, they would still have a margin of $400,000 at the end. But in order to reach their initial goal of $13,000,000 they would have to set the new prices at $3,250. D. They might not sell because of high costs E. (did not understand this question)

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