Answer:
Williams Products' Cost Elements:
Variable cost per unit = $6
Fixed Costs = $60,000
a) With selling price at $18, contribution margin = Selling price - Variable cost per unit = $12 $(18 - 6)
Break even point (in units) = Fixed Costs/Contribution Margin
= $60,000/$12 = 5,000 units
b) Forecast sales of 10,000 units with selling price at $14 each:
Total contribution to profits = Sales - Total Variable Costs
Sales = 10,000 x $14 = $140,000
Variable Costs = 10,000 x $6 = $60,000
Total Contribution = $80,000 (140,000 - 60,000)
c) Forecast sales of 15,000 units with selling price at $12.50 each:
Sales = 15,000 x $12.50 = $187,500
Variable Costs = 15,000 x $6 = $90,000
Total Contribution = $97,500.
Therefore, pricing at $12.50 each would result in the greater contribution to profits.
d) Other considerations crucial to the final decision about making and marketing the new product include: competitors' reactions to pricing, demand elasticity, consumers' preference, existing production technology, etc.
Explanation:
a) Contribution margin is equal to Selling price minus variable cost per unit. This is the first element towards calculating break even point in units.
If 5,000 units are produced, total contribution would be equal to $60,000 ($12 x 5,000 units).
b) There are many pricing strategies which a producer can adopt depending on prevailing circumstances. A few of them are price skimming, penetration pricing, price premium, price discrimination, value-based pricing, time-based pricing.
