The Precision Writing Instruments Company makes two pen designs - the Cordova design and the Savannah design.These data apply,regardless of which of two pen designs is being implemented.Materials cost per pen is $6.Labour cost per pen is $5.Production overhead is $1,000,000.Advertising and promotion is $1,000,000.Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price.For the Cordova design,Q = 150 - 2.5P.For the Savannah design,Q = 175 - 2.1P.A price skimming strategy is proposed for the Savannah design and a price of $40 is selected.What will be the profit or loss for the first year?
A)$600,000 loss
B)$639,000 profit
C)$994,000 profit
D)$1,639,000 profit

Question

Quizplus · Accepted Answer

The profit is calculated as follows: Revenue = Price x Quantity. For Savannah, Q = 175 - 2.1(40) = 91,000 pens. Revenue = 40 x 91,000 = $3,640,000. Total cost = (Materials + Labour) x Quantity + Overheads + Advertising = (6 + 5) x 91,000 + 1,000,000 + 1,000,000 = $3,001,000. Profit = Revenue - Total cost = $3,640,000 - $3,001,000 = $639,000.

The Precision Writing Instruments Company Makes Two Pen Designs -