Company XZC sells its Lenex Brand to four different segments—A, B, C, and D. The variable cost for Lenex is $15. The size of each segment is 1000 people. The reservation prices for the segments are:

A $50
B $40
C $30
D $20

1.Assuming the XZC cannot use price discrimination, at what price should it sell Lenex to maximize its profits? How much would the profits be?
2.If Lenex could use price discrimination, how much would the profits rise? What would be the practical difficulty in implementing it?

3.Assume that the government wants everyone to be able to afford Lenex. It offers XZC a subsidy of $20,000 if XZC sells Lenex to all 4000 potential customers. Should XZC accept this offer? (Hint: XZC is trying to maximize its profits and in this case cannot use price discrimination.)

4.Assume that the government wants everyone to be able to afford Lenex. It offers XZC a subsidy of $7 per unit sold if XZC sells Lenex to all 4000 potential customers. Should XZC accept this offer? (Hint: XZC is trying to maximize its profits and in this case cannot use price discrimination.) You must show all calculations to receive credit. (Points : 25)

5. Creative Solutions, Inc. has a successful brand with the name Top Goal. The market size in which Top Goal competes is $2 billion, and Top Goal has generated sales of $150 million. It has a contribution margin of 30%.

Creative Solutions is thinking of introducing a new brand under the name of Peak Goal. Peak Goal will compete in the same market as Top Goal. The budget to launch this brand is expected to be $20 million.

If it is launched, Peak Goal will capture 10% of the market. It has a contribution margin of 40%. Half of the sales of Peak Goal will be cannibalized from the sales of Top Goal. An alternative strategy for Creative Solutions is to cancel the introduction of Peak Goal and instead to spend the $20 million to promote Top Goal. This action is expected to double the sales for Top Goal. Both brands (Top Goal and Peak Goal) would sell at the same price.

Where should the company spend the $20 million and why? You must show all calculations to receive credit.

6. Forsman, Inc. has sales of $10,000,000. The contribution margin is 40% and the fixed costs are $1,000,000. The price per unit is $10. The company is considering two different strategies for increasing their profits: 1.Spend $800,000 in advertising. The result is expected to increase the company’s sales by 50%.
2.Reduce the price by 20%. The price-demand elasticity is 2.0.

Which of the two strategies will generate the highest profits? You must show all calculations to receive credit. (Points : 25)

 

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Assuming the XZC cannot use price discrimination, at what price should it sell Lenex to maximize its profits Answer