wendel Stove Company is developing a \"professional\" model stove aimed at the h
ID: 2670314 • Letter: W
Question
wendel Stove Company is developing a "professional" model stove aimed at the home market. The company estimates that variable costs will be $2,000 per unit and fixed costs will be $10,000 per year.
Solve:
A: Suppose the company wants to set its price equal to full cost plus 30 percent. To determine cost, the company must estimate the number of units it will produce and sell in a year. Suppose the company estimates that it can sell 5,000 units. What price will the sompany set?
B: What is "odd" about setting the price based on an estimate of how manyh units will be sold?
C: Suppose the company sets a price as in Part A, but the number of units demanded at that price turns out to be 4,000. Revise the price in light of demand for 4,000 units.
Explanation / Answer
a)
SP = (FC/Q +VC)*mark up factor, k (per unit values)
SP = (10000000/5000 + 2000)*1.3 (k = 1.3, as cost plus 30% is SP)
=> = (2000+2000)*1.3 = 5200 ($) (ANSWER)
b) The price may sometimes be high based on estimates of sale quantity if it is less than BEP and actual demand at the set price may be less than estimated.
(BEP in a) above = 10000000/(5200-2000) = 3125 and 5000 is ok.)
c)
for 4000 units, SP = (10000000/4000+2000)*1.3 =5850 ($) (ANSWER)
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