You are preparing for a meeting at which your company will discuss its selling price for a new product. You have already made the decision to invest $2.3 million in production facilities with a capacity to produce 350,000 units per year. Fixed expenses, including depreciation and minimal advertising, will be $300,000 per year. Variable expenses will be $4 per unit. Your marketing people have developed three sales scenarios:
- At a price $7 per unit, below much of the competition, you sell 200,000 units per year.
- At a price $9 per unit, the average among the competition, you sell 135,000 units per year.
- At a price of $7 per unit, with an additional $400,000 per year spent to advertise your low price, you sell 300,000 units per year.
Prepare a schedule (according to the following format) that shows the pro forma
Unit price estimated sales in units Strategy A Strategy B Strategy C
Sales revenue
Variable expenses
Fixed expenses
Additional advertising
Total expenses
Pro forma operating profit
Which scenario would you recommend? Why?