Problem
Ken sells air fryer in a market. he plans to launch a new advanced model and considers two targeting options: it can go either after a high end market with the price of $100 per air fryer or after a low-end market with $60 per air fryer.
i. Variable cost per new air fryer is expected to be either $75 for a high-end model or $48 for the low-end model. Ken's fixed costs directly related to manufacturing (excluding marketing) are $2.5 million per year. Calculate the quantity of air fryer that Ken needs to sell to break even for $100 option and $60 option.
ii. Current model is sold at $85 per air fryer. At this price annual sales are estimated at 260,000 units. Observing consumers' behavior during sales events when price was dropped to $50, Ken's managers estimated that at that price annual sales would be 460,000 units. Calculate expected sales at $100 and $60 per air fryer.
iii. Which estimate of expected sales is more trustworthy, for $100 or for $60? Why?
iv. Will Ken break even selling at $100? At $60?
v. Calculate expected annual contribution before marketing for $100 option and $60 option.
vi. With fewer potential customers, marketing to the high-end is expected to cost Ken about $250,000 a year, compared to $350,000 for a low-end option. Calculate expected contribution after marketing for $100 option and $60 option.
vii. Which targeting option has better profit potential? Why?