Apple's (AAPL) iPad jump started the touchscreen computer market to levels few analysts had ever dreamed possible. Moreover, the popularity of the iPad pushed Apple's competitors to offer similar touchscreen computers. Hewlett Packard offered its Slate product and others soon followed suit. One such manufacturer was Soko Industries. The Soko product, the sPad, had a number of appealing features but the relative obscurity of the company did not help product sales. In fact, the sPad was initially sold for $600, and disappointing sales led Soko Industries management to consider taking a 25 percent price break on its sPad, which costs $400 to manufacture and sell.
a. If Soko goes through with the price adjustment and it leads to total sales of 400,000 sPads, what are the incremental revenues attributable to the new pricing strategy?
b. Now suppose that for each new sPad it sells, the firm also sells an average of $100 worth of applications on which the firm has 75 percent operating profit margins (i.e., the firm earns $75 in additional operating profits for each $100 in application sales). What is the incremental impact on firm operating profits of the new lower price strategy under these conditions?

  • CreatedOctober 31, 2014
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