Question

A company sells two products, Product A and Product B. Assume that the variable costs for each product are $7. In a particular market, men and women value the two products as follows:

	Value to the Customer
	Product A	Product B
Men (50 % of market)	$ 12	$ 15
Women (50 % of market)	$ 14	$ 11

1. If management is considering offering a bundle containing both products, what is the maximum price that could be charged for this bundle? Justify your answer.
2. If the company’s goal is to maximize profits, should these products be offered only bundled together, offered only separately, or offered both bundled together and separately? Justify your answer.

Answer 1

a. The maximum price that could be charged for the bundle is $14 + $11 = $25. It means lowest price of two set of goods separately paid by the women. This price is total 14 +11 =25. If bundle price are charged $25 then both Men and Women will be ready to buy this product. Lowest total of individual price can be set as bundle price.

b. Yes, if the company's goal is to maximize profits it should offered only bundled together. Because if it sells separately then product- B will be sold to Men and product - A will be sold to women only. For product - B Men are paying higher price and for product - A women are paying higher price.

Let suppose there is total 100 people in the market. So 50 will be men and 50 will be women. Now if product B are sold to men then total sell will be 50 and product A will be sold 50 to women. So total earnings by selling separately will be 50*15 + 50*14 = $1450. Total cost will be 50*7 *+50*7 = $700. So total profit under separate selling is 1450 - 700 = $750.

Now we consider bundle pricing. If we apply bundle pricing then bundle price is $25 and in this price total sales will be 50 for men and 50 for women. Total earnings will be 100*25 =$2500. Total cost will be 7*100 +7*100 = $1400. It means total demand for product A will be 100(50+50) and total demand for B will be 100(50+50). Now total profit under bundle pricing is 2500 - 1400 =$1100. Therefore profit under bundle price is more than the separate selling.