Elite Kitchenware has come out with a new line of dishes that it plans to test market through a series of demonstrations at the local mall throughout the month of August. If the demonstrations result in enough sales, then the program will be expanded to other malls in the region. The cost of the demonstrations is a flat fee of $1,000 to the mall owner/operator and a commission of 25 percent of revenue to the person giving the demonstrations (the demonstrator will not receive any salary beyond this commission).
Elite Kitchenware’s fixed costs of producing the dishes are $5,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered (there will be no beginning or ending inventory). Variable production costs are $15 per set of dishes. In addition, it will cost approximately $10 per set to ship the dishes to customers.
Beverly Slather, a product manager at Elite Kitchenware, is charged with recommending a price for the item. Based on her experience with similar items, focus group responses, and survey information, she has estimated the number of units that can be sold at various prices.
Price Quality
$69.99 300
$59.99 500
$49.99 650
$39.99 800
$29.99 1000
a. Calculate expected profit for each price.
b. Which price maximizes company profit?