Question: Pricing to Maximize Contribution Reynolds Company produces and sells picture frames. One particular frame for 8 * 10 photos was an instant success in the market, but recently competitors have come out with comparable frames. Reynolds has been charging $12.50 wholesale for the frames, and sales have fallen from 10,000 units last year to 7,000 units this year. The product manager in charge of this frame is considering lowering the price to $10 per frame. He believes sales will rebound to 10,000 units at the lower price, but they will fall to 6,000 units at the $12.50 price. The unit variable cost of producing and selling the frames is $6, and $60,000 of fixed cost is assigned to the frames.
1. Assuming that the only prices under consideration are $10 and $12.50 per frame, which price will lead to the largest profit for Reynolds? Explain why.
2. What subjective considerations might affect your pricing decision?