Cost-Plus Pricing. Wendel Stove Company is developing a "professional" model stove aimed at the home market. The company estimates that variable costs will be $2,000 per unit and fixed costs will be $10,000,000 per year.
Required
a. Suppose the company wants to set its price equal to full cost plus 30 percent. 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 5,000 units. What price will the company set?
b. What is "odd" about setting the price based on an estimate of how many units will be sold?
c. Suppose the company sets a price as in part a, but the number of units demanded at that price turns out to be 4,000. Revise the price in light of demand for 4,000 units.
d. What will happen to the number of units that will be sold if the price is raised to the one you calculated in part c?
e. Explain why setting price by marking up cost is inherently circular for a manufacturing firm.