Operating Leverage and Business Risk 6.) Suppose that a company has a monoply fo
ID: 3197961 • Letter: O
Question
Operating Leverage and Business Risk
6.) Suppose that a company has a monoply for a product so that you can set the price as it chooses. What are the benefits and the dangers to the company of pricing its product at $1,100 per unit?
7.) If a company has a monoply for this product so that it can set the price, what are the benefits and the dangers to the company of pricing its product at $101 per unit?
8.) Suppose the company currently is labor-intensive so that the monthly fixed cost is $10,000 and the variable cost is $100 per unit. But installing modern equipment will reduce the variable cost to $50 per unit, while increasing monthly fixed cost to $30,000. Also suppose that the selling price per unit is p= $200.
(a) Which of these operations will have the highest operating leverage? Explain.
(b) Which of these operations will have the highest business risk? Explain?
(c) What is the relation b/w high operating leverage and risk? Discuss the benefits and dangers of the second operating plan. Justify your answer.
Explanation / Answer
6.) Suppose that a company has a monoply for a product so that you can set the price as it chooses. What are the benefits and the dangers to the company of pricing its product at $1,100 per unit?
There are a lot of factors to be considered to understand the benefits and dangers for putting the price @$1100 like-
a) It is great rounded price, people like that. It is close to what you can in the range as magic price point.
b) Without actually knowing the value of the product or value accepted by this price point for the product in cosumers, very difficult to comment on dangers or benifits.
c) Company may lose out some customer based on price point. Because some customers are just price point sensitive and would postpone or discard the idea of buying the product
d) While on the other hand, there might be customers who are in dire need of the product and will buy it at any price point.
e) These dangers and benifits can be sorted by any consumer study regarding the price point of the product.
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