Reference no: EM132812934

Firm W sells widgets in a reasonably stable market. It plans to launch a new, more advanced model and considers two targeting options: it can go either after a high end market with the price of $100 per widget or after a low-end market with $60 per widget. We need to advise them which option promises better profitability.

1. Variable cost per new widget is expected to be either $75 for a high end model or $48 for the low-end model. W's fixed costs directly related to manufacturing (excluding marketing) are $2.5 million per year. Calculate the quantity of widgets that W need to sell to break even for $100 option and $60 option 208,334; 100,000

2. Current model is sold at $85 per widget. At this price annual sales are estimated at 260,000 units. Observing consumers' behavior during sales events when price was dropped to $50, W's managers estimated that at that price annual sales would be 460,000 units. Calculate expected sales at $100 and $60 per widget.

174,286; 402,858

(answers can vary because of rounding)

3. Which estimate of expected sales is more trustworthy, for $100 or for $60? Why? (2 points)

4. Will W break even selling at $100? At $60?

5. Calculate expected annual contribution before marketing for $100 option and $60 option Answers can vary slightly because of the rounding

$1,857,142.86; $2,334,285.71 (for not rounded demand numbers)

$1,857,150; $2,334,296 (for rounded demand numbers)

6. With fewer potential customers, marketing to the high-end is expected to cost W about $250,000 a year, compared to $350,000 for a low-end option. Calculate expected contribution after marketing for $100 option and $60 option.

$1,607,142.86; $1,984,285.71

7. Bottom line: which targeting choice has better profit potential? Why?