Question

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. Labor 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 penetration strategy is proposed for the Savannah design and a price of $25 is selected. What will be the profit or loss for the first year?

Answer 1

9514 1404 393

Answer:

loss of $285,000

Explanation:

The demand for the Savannah design is estimated to be ...

Q = 175 -2.1P = 175 -2.1(25) = 122.5 . . . . thousand pens

Then the contribution margin from sales will be ...

122,500($25 -$6 -$5) = $1,715,000

Against a total of $2,000,000 in production and advertising costs, the net will be a loss of ...

$2,000,000 -1,715,000 = $285,000

The first-year loss will be $285,000.