Question

The scenic company is about to launch a new product. The test market results indicate that potential customers like the new product. Based on extensive research the following estimates have been developed for the first 3 years. These estimates are for the market as a whole. During year 1 you will be the only firm in the market:

                  Year 1                Year 2                Year 3

Price          Volume               Volume               Volume

$10            30,000                50,000                80,000

$14            20,000                35,000                50,000

$18            10,000                15,000                20,000      

$22            5,000                 10,000                15,000

Assume that the estimated direct cost of building the first unit is $12 and that a 95% experience rate will occur. If you set the price at $10, competition will not enter until year 3 and will take 30,000 units in that year. If you price at $14, competition will enter in year 2 and take away 5,000 units in year 2 and 25,000 units in year 3. If you set the price at $18 or $22 competition will enter in year 2 and they will take away half of the units in each of those years. What would be the total contribution to profits over the 3 year period for each of these pricing options. Show all of your work.

Answer 1

Profit = Price * Total Volume - Total cost