21 Speed Gizmos Exercise
Would you launch the DCS?
I would launch the DCS. Since the break-even volume for each price point is far less than the expected demand for each price point, DCS will easily exceed the number of units that need to be sold to cover fixed costs. However, when total profit before taxes is compared to total costs (both variable and fixed), the costs exceed the profit. But since demand is expected to increase 20% for at least the next two years, profits can be expected to increase (and costs may decrease due to economies of scale).
How would you price the DCS? Why?
I would price the DCS at $99.95 in order to maximize total profit before taxes.
Derrailleur just found out that adding a radio option to the DCS would only cost an additional $5 in materials and labor. He is considering launching DCS II next year. How would that change the pricing of the DCS?
By introducing the DCS II in a year, the sales of this new product will eat into the sales of the old product. The ‘lost’ contribution from the old product will have to be subtracted from the total contribution of the new product in order to determine the net gain to use for break even volume analysis of the new product. If the DCS II is going to be launched in a year, it might be advisable to lower the retail price (and thus the selling price) of the DCS. This will cause the net gain to be higher, which will lower the break-even volume for the DCS II.
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