Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program.The cable program's fee for selling the item is 20% of revenue.For this fee, the program will advertise the thermostat over six 10-minute segments in September.Allstate's fixed costs of producing the thermostats are $110,000 per production run.The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered.Variable production costs are $25 per unit.In addition, it will cost approximately $5 per unit to ship the thermostats to customers.Production time will be less than three weeks.Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat.Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: $\begin{array}{cr}
\text { Unit Price } & \text { Quantity } \
\$ 90 & 5,000 \
\$ 77 & 8,000 \
\$ 65 & 11,000 \
\$ 62 & 13,000
\end{array}$ At which price should the company sell it products?

Question

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program.The cable program's fee for selling the item is 20% of revenue.For this fee, the program will advertise the thermostat over six 10-minute segments in September.Allstate's fixed costs of producing the thermostats are $110,000 per production run.The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered.Variable production costs are $25 per unit.In addition, it will cost approximately $5 per unit to ship the thermostats to customers.Production time will be less than three weeks.Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat.Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: $\begin{array}{cr}
\text { Unit Price } & \text { Quantity } \
 \$ 90 & 5,000 \
\$ 77 & 8,000 \
\$ 65 & 11,000 \
\$ 62 & 13,000
\end{array}$ At which price should the company sell it products?

Quizplus · Accepted Answer

The correct answer is D. At a price of $62, the company can sell 13,000 units. The revenue will be $62 * 13,000 = $806,000. The cable program's fee will be 20% * $806,000 = $161,200. The fixed costs are $110,000. The variable production costs will be $25 * 13,000 = $325,000. The shipping costs will be $5 * 13,000 = $65,000. The total costs will be $110,000 + $325,000 + $65,000 + $161,200 = $661,200. The profit will be $806,000 - $661,200 = $144,800.