Question

PLEASE SCROLL RIGHT FOR THE FULL QUESTION

1) Apple, Inc. is launching it's next version of iPhone, the iPhone X, and needs your help to determine how to price the phone.

Here are some facts related to the iPhone costs, sales and investment:

- The unit cost to produce and sell an iPhone is $150.

-Apple wishes to make a 40% return on iPhone sales.

- Apple wishes to make a 70% return on the $850 million in capital invested in producing and selling the iPhone.

- Historically, a 10% increase in the price of the iPhone has led to a 14% decrease in the demand for iPhones.

- Apple expects to sell 10 million IPhone X units.

---

a. Using the Markup Pricing formula, what price should Apple charge for its iPhone X?

b. Using the Target-Return Pricing formula, what price should Apple charge for its iPhone X?

c. Calculate the Price Elasticity of Demand for iPhone X using the historical iPhone demand/pricing data.

d. Calculate the profit-maximizing price Apple should charge for its iPhone using the "Profit-maximizing Price" formula and the price elasticity of demand coefficient you calculated in c. Assume unit cost is all variable cost.

e. An experience curve analysis predicts that one year from now, it will cost $120 to produce and sell the iPhone X. Price elasticity of demand is also expected to double from its original value since the phone is now one year old and somewhat less desirable. Using the "Profit-maximizing Price" formula, what price should Apple expect to charge for its iPhone X one year from now?

2) Toyota is launching it's next version of the hybrid Prius model and needs your help to determine how to price the car.

Here are some facts related to the Prius cost structure and expected sales volume:

- The variable cost to produce and sell one Prius car is $12,000.

- The annual fixed costs associated with Prius production and sales are $500 million ($500,000,000)

- Toyota expects to sell approximately 400,000 new Prius cars.

a. Using the "Cost-Volume-Profit" pricing formula, what price should Toyota charge in order to break even on sales of its new Prius model?

b. Using the "Cost-Volume-Profit" pricing formula, what price should Toyota charge in order to achieve annual profits of $2 billion with its new Prius model?

c. Assume Toyota intends to price the new Prius model at $25,000 per unit. Using the "Cost-Volume-Profit" pricing formula, calculate the number of Prius models Toyota needs to sell in order to break even (i.e. make zero profits).

d. Assume again that Toyota intends to price the new Prius model at $25,000 per unit. Using the "Cost-Volume-Profit" pricing formula, calculate the number of Prius models Toyota needs to sell in order to earn annual profits of $3 billion?

Answer 1

A Using the Markup Pricing formula, what price should Apple charge for its iPhone X? The unit cost to produce and sell an iPhone = Apple wishes to make a 40% return on iPhone sales $ 150 $ 100 Target Price = $250 ($ 150 / 60% Cross check: $250 * 40% - $100 B. Using the Target-Return Pricing formula, what price should Apple charge for its il'hone X? A. Apple wishes to make a 70% reburn on the $850 million in capital invested $ 850 million $ 595 million 70% Apple expects to sell 10 million IPhone X units Rotum required per unit of IPhone X units $ 595 million/10 million units 5 59.5 $ 150 The unit cost to produce and sell an iPhone - Target Price = $ 209.5 C Calculate the Price Flasticity of Demand for iPhone X using the historical iPhone demand/pricing data A. Historically, a 10% Increase in the price of the iPhone has led to a 14% decrease in the demand for iPhones Price Elasticity of Demand = Pcrccntaec change in Demand / Percentage charac in Price - 14 Percent 10 Percent - 1.4 D. Calculate the profis-maximizira price Apple should charac for its iPhone using the 'Profis-maximizing Price" formula and the price elasticity of demand coefficient you calculated in c. Assure unit cost is all variabile cost. A To calculate profit maximization price and quantity, the supply function and demand function is needed. Price of the product is assumed to be $ 250 as calculated in point A Net Contribution 5 Incremental Profit 5 100 Quantity Price 5 10000 250 R600 275 7396 303 636 333 5470 366 4704403 4046 443 3479 487 Variable Cost $ 150 150 150 150 150 150 125 153 183 | Total Profit $ 1000000 1075-000 1127890 1162392 1181674 1188423 118492R 1173241 216 75000 52890 34502 9782 6754 -3450 -11797 253 793 337 At this point incremental profit Is turning into loss. 150 | So the optimal price = $ 403 at the quantity of 4704 units E. An experience curve analysis predicts that urie year fornirow, it will cost $120 to procure and sell the iPhone X. Price elasticity of demand is also expected to double from its original value since the phone is now one year old and somewhat less desirable. Using the 'Profit-maximizing Price" formula, what price should Apple expect to charge for is iPhone X orcycar from now? Incremental Profi: 5 Variable Cost $ 120 120 120 120 Net Contribution 5 130 180 At this point incremental profit Is tuming into loss. Quantity Price 5 10000 250 7200 300 5184 360 3732432 2687 518 1935 622 1393746 1003896 240 312 Total Profit $ 1300000 1296000 1244160 1164531 1070654 971483 872797 778170 120 398 SOZ -4000 -51840 -79626 -93879 -99171 98686 -94627 120 120 120 626 776 1 So the optimal price = $ 250 at the quantity of 10000 units

A. Using the "Cost-Volume-Profit" pricing formula, what price should Toyota charge in order to break even on sales of its new Prius model? Variable cost Annual fixed costs Volume $ 12,000 $ 500,000,000 400,000 Break eve sales Fixed cost / Contribution Per Unit $ 500,000,000 / (X - $ 12,000) 400,000 400,000 (X - $ 12,000) 400,000 X $ 500,000,000 / (X - $ 12,000} $ 500,000,000 $ 500,000,000 + $ 4,800,000,000 $5,300,000,000 13250 $ 13250 Price B. Using the "Cost-Volume-Profit" pricing formula, what price should Toyota charge in order to achieve annual profits of $2 billion with its new Prius model? Required Profit 400,000 400,000 (X - $ 12,000) 400,000 X (Fixed cost + Required Profit) / Contribution Per Unit ($ 500,000,000 + $ 2,000,000,000)/(X - $ 12,000) $ 2,500,000,000 $ 2,500,000,000 + $ 4,800,000,000 $ 7,300,000,000 18250 $ 18250 Price C. Assume Toyota intends to price the new Prius model at $25,000 per unit. Using the "Cost-Volume-Profit" pricing formula, calculate the number of Prius models Toyota needs to sell in order to break even (i.e. make zero profits). Break eve sales volume Fixed cost / Contribution Per Unit $ 500,000,000 / ($ 25,000 - $ 12,000) $ 500,000,000/($ 13,000) 38462 Number of Units D. Assume again that Toyota intends to price the new Prius model at $25,000 per unit. Using the "Cost-Volume-Profit" pricing formula, calculate the number of Prius models Toyota needs to sell in order to earn annual profits of $3 billion? Required Profit (Fixed cost + Required Profit) / Contribution Per Unit ($ 500,000,000+ $3,000,000,000} / ($ 25,000 - $ 12,000) ($ 3,500,000,000)/($ 13,000 269231 Number of Units