Question

Block Island TV currently sells large televisions for​ $380. It has costs of​ $320. A competitor is bringing a new large television to market that will sell for​$360. Management believes it must lower the price to​ $360 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by​ 10%, even with a new competitor in the market. Block Island TV sales are currently​ 150,000 televisions per year.

What is the change in operating income if marketing is correct and only the sales price is​ changed?

2.

Expo Manufacturing​ Inc., is in the process of evaluating a new product using the following​ information:

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•A new transformer has three production runs each​ year, each with​ $14,000 in setup costs.

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•The new transformer incurred​ $50,000 in development costs and is expected to be produced over the next three years.

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•Direct costs of producing the transformers are​ $55,000 per run of​ 5,100 transformers each.

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•Indirect manufacturing costs charged to each run are​ $55,000.

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•Destination charges for each transformer average​ $4.00.

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•Customer service expenses average​ $0.20 per transformer.

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•The transformers are selling for​ $40 the first year and will increase by​ $2 each year thereafter.

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•Sales units equal production units each year.

What are estimated​ life-cycle revenues?

2.

Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the​ store's normal operations per​ week:

Average rentals per day on Friday and Saturday	1,250
Average rentals per day on Sunday through Thursday	550
Store hours per day	12
Total units available for rent	11,000
Variable operating costs per hour	$45
Marketing costs per week	$2,000
Customer service costs per week	$300

The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental​days?

Answer 1

1.

	Current position	Proposed position
Sales units (i)	150,000	165,000
Selling price per unit (ii)	$380	$360
Cost price per unit (iii)	$320	$320
Profit per unit (iv) = (ii) - (iii)	$60	$40
Total profit (i) x (iv)	$9,000,000	$6,600,000

Hence, if selling price is reduced, operating income would decrease from $9,000,000 to $6,600,000.

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