A car dealer sells a car for an average price of $32,000 and purchases it from the manufacturer for $29,440. The current sales level is 650 new cars sold per year, which had remained steady over the past five years. Of these 650 cars sold, 488 were sold to people who had never purchased from this dealership before. The Dealer was currently spending $120,000 in advertising per year to attract new buyers. In addition, the firm was spending $10 per year to send birthday cards and flyers to customers who had purchased cars from them in the previous four years. The typical customer purchases a new car every four years and 25% of the dealer’s customers buy their next new car from this dealer. The discount rate for the dealer is 5% per year. Calculating the discount rate for a four year period is (1.05)4 -1.
Evaluate each of the alternatives separately.
1. If they increase their advertising expenditure by $20,000, they believe they will be able to sell 10 more of these cars to new buyers. What is the MROS of this proposal? Should they do it? 2. If they reduce the retail margin to 7%, how many more cars must they sell to be as well off as they are with the current pricing structure? 3. Would it make sense to increase the spending on current customers from $10 per year to $20 per year on retaining their current customers if the retention rate increases from 25% to 27.5%? How much does the lifetime value of the customer change?
A firm has developed digital lights (LEDs) to replace incandescent lights. They are trying to figure out how much they could charge for these new lights. The new LED light costs the firm $4 to produce. The current incandescent bulbs are sold for 25 cents each and last on average 1000 hours. The new LED lights use one tenth of the energy that the incandescent bulbs use and last 50,000 hours. Energy costs of using one incandescent bulb for one hour are .00685 cents. It costs each of the companies 10 cents in...
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