(Incremental earnings from lowering product prices)The popularity of iPads pushed Apple's competitors to offer similar touch screen products. One such manufacturer was XYX Industries. The XYZ product had a number of appealing features but the obscurity of the company didn't help product sales. In fact, the product was initially sold for $550, and disappointing sales led XYZ to consider a 10% price break on its product which costs $350 to manufacture and sell.
a) If XYZ goes through with the price adjustment and it leads to total sales of 250,00 units, what are the incremental revenues attributable to the new pricing strategy.
i) $123,750,000,
ii) $36,250,000,
iii) $137,500,000 OR
iv) $50,000,000
b) Now suppose that for each new unit it sells, the firm also sells $100 worth of applications on which the firm has a 35% profit margin(i.e. the firm earns $35 in additional operating profits for each $100 application sales) What is the incremental impact on firms operating profits of the newer lower price strategy under these conditions?
By including the $35 in additional operating profits for applications, we also need to include the 250,00 units x $35=$8,750,000. Thus the incremental revenue of the product attributable to the new pricing strategy should be $45,000,000. True or False?