Problem: Wendel Stove Company is developing a 'professional' model stove aimed at the home market. The company estimates that variable costs will be $2,500 per unit and fixed costs will be $12,000,000 per year.
1) Suppose the company wants to set its price equal to full cost plus 30%. To determine cost, the company must estimate the number of units it will produce and sell in a year. Suppose the company estimates that it can sell 6,000 units. What price will the company set?
Units Est. 6,000 Given
VC Per Unit $2,500 Given
Fixed Costs $12,000,000 Given
2) What is odd about setting the price based on an estimate on how many units will be sold?
3) Suppose the company sets a price as in part a, but the number of units demanded art tht price turns out to be 5,000. Revise the price in light of the demand for 5,000 units.
Units Est. 5,000 Given
VC Per Unit $2,500 Given
Fixed Costs $12,000,000 Given
4) What will happen to the number of units that will be sold if the price is raised the the one you calculated in part c?
5) Explain why setting price by marking up cost is inherently circular for a manufacturing firm.