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 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?
A)$306,250 loss
B)$2,112,500 profit
C)$2,222,500 profit
D)$285,000 loss

Question

Quizplus · Accepted Answer

To calculate the profit or loss for the Savannah design at a price of $25, we first determine the demand using the given demand function Q = 175 - 2.1P. Substituting P = $25, we get Q = 175 - 2.1(25) = 175 - 52.5 = 122.5 thousand units. The total revenue is then 122.5 thousand units * $25 = $3,062,500. The total variable cost is the sum of materials and labor costs per pen, which is $6 + $5 = $11 per pen, leading to a total variable cost of 122.5 thousand * $11 = $1,347,500. The fixed costs are the sum of production overhead and advertising, which is $1,000,000 + $1,000,000 = $2,000,000. Therefore, the total cost is $1,347,500 + $2,000,000 = $3,347,500. The profit or loss is the total revenue minus the total cost, which is $3,062,500 - $3,347,500 = -$285,000, indicating a loss of $285,000.

The Precision Writing Instruments Company Makes Two Pen Designs -