EXAMPLE 1:
You invested $50,000 of one-time R&D in year 1 and your fixed costs are $10,000 per year and your variable costs are $5/unit. Assuming that your product is completely inelastic (demand will not change depending on your pricing decision) and expected demand is 5000 units/year, what would you need to sell your product for (lowest price) to break even after 2 years?
EXAMPLE 2:
Same scenario as before but company wants to break even in Year 1 (for tax purposes, the company doesn't want a gain or a loss) AND make at least $30,000 in year 2 (assume that R&D is completely written off in Year 1). Again, assume volume is constant. Assume that you can not alter the price between years 1 and 2. What would be your price and how much would you make in Year 2?
EXAMPLE 3: Let's say that volume is not constant but is relatively inelastic (the elasticity equals -.5). One option is to price it at $20 for a demand of 5000 units per year. What would the volume be if the product were priced at $16?
EXAMPLE 4:
How much money over 2 years would you make under each of the 2 pricing options in Example 3 using the costs in Example 1? Which pricing option would you go with?
EXAMPLE 5:
What would the price elasticity have to be for you to be indifferent between the two pricing options? (i.e. The profit would be the same after two years under either scenario).