Question

Read the following article:

pple is renowned for its innovative products, its sleek hardware design, and, of course, its fat profit margins. That last point is as true as ever with its new iPhone 6, for which Apple is charging more than three times the cost of components and manufacturing.

According to a teardown report from research firm IHS, the components and manufacturing cost of a 16GB iPhone 6 cost Apple $200.10. The device is selling for $649 in the U.S. without a contract with a wireless carrier. That gives the device a profit margin of about 69%. The iPhone 6 Plus, which costs $100 more than its smaller cousin, costs just $15.50 more for components and manufacutring, according to IHS. That’s a 71% margin.

The figures don’t give a complete picture of the costs that go into the iPhone. Apple also spends money on research and development, software, shipping, marketing, licensing and other costs. But even with all expenses included, Apple’s margins are huge. The company had gross margins of 39.4% in the most recent fiscal quarter, an improvement from 36.9% the year prior.

An Apple spokeswoman did not respond to an email seeking comment.

The biggest expense for both devices is the touchscreen, which costs $45 on the 4.7-inch iPhone 6 and $52.50 on the 5.5-inch iPhone 6 Plus. The iPhone 6 Plus’s other main selling point besides size is its fancier camera featuring optical image stabilization. That costs $12.50, compared to $11 for the iPhone 6’s camera.

Many customers aren’t aware of the iPhones’ true retail cost. In the U.S., most customers buy smartphones at a steep discount in exchange for signing two-year contracts with wireless carriers. The iPhone 6 costs $199 with a contract and can currently be had for free from many of the carriers if customers trade in an old iPhone toward its purchase. In markets where pricing is more transparent, like in China, Apple has faced stiffer competition.

Answer the following questions:

Using the cost information in the article, calculate the markup percentage Apple used to reach the suggested retail price for the iPhone 6 and iPhone 6 Plus.

Identify additional variable costs that Apple will likely incur on each iPhone it sells and estimate those costs. Using these estimates and assuming that the reported costs for the iPhone are all variable, calculate the iPhone’s contribution margin per unit.

Similar articles have estimated markups of 229.4% on the iPhone 5 and 245.2% on the iPhone 4s, all at a retail price of $649. What might have led Apple to hold the price on the various iPhone models at the same level as the iPhone 4s, even though the cost of components increased?

Answer 1

Answer
Sr. No.	Particulars	($)	($)	Remarks
1	Cell Phone	iPhone 6	iPhone 6+
2	Storage Capacity/Inch	16 GB/4.7 inch	5.5 inch
3	Manufacturing Cost	200.1	300.1
4	Selling Price in US	649
5	Profit Margin ((4-3)/4*100)	69.17%	71
6	Extra cost of iphone 6+ for component & manufacturing	-	15.5	Additional Variable Cost
7	Biggest Exp- Touchscreen	45	52.5	Additional Variable Cost
8	Biggest Exp-Camera Featuring	11	12.5	Additional Variable Cost
9	Contract cost with condition	199	0
10	Apple's Gross Margin in most recent quarter	39.40%
11	Apple's Gross Margin in quarter year prior	36.90%
WN1 :	Cost of iphone 6+ = 200.1 + 100 = $ 300.1
	Masrk up percent = Margin /Cost *100
	Masrk up percent for iPhone 6 = (649-200.1) /200.1 *100
	224.34%
	iPhone 6+ Retail Price = Cost + Markup
	iPhone 6+ Retail Price = 300.1+(300.10*224.34%)
	973
	(Assuming as all cost are variable )
	Contribution Per Unit = Sales Per Unit - Variable Cost per Unit
	iPhone 6+ Retail Price = (649-200.1)	448.9
	iPhone 6+ Retail Price = (973-300.1)	672.9
	The reason of keeping retail price at same price for iPhone 4 and iPhone 5 is
	Increased demand expectation due continue features improvement and new
	experiment in I Phone. Even quarterly result say the same. It is also to be noted that
	different different selling strategy launched by Apple is also one of the reason for
	maintaing price same as overall margin strategy and control over most of market.