Innova Solutions has developed a software product that enables users to electronically prepare and file their state
Question:
Demand would increase to 150,000 copies in the first year if the selling price were $15 per copy and to 300,000 copies in the first year if the selling price were $5 per copy. As you know, end-users invest considerable time in learning how to use new software packages. As a result, they tend to stick with the same software year after year. Moreover, initial acceptance is extremely important; you expect that the number of copies sold in the first year will equal the number of copies sold in the second year. Thus, if Innova Solutions sells 75,000/150,000/300,000 copies in the first year, it also expects to sell 75,000/150,000/300,000 copies in the second year (as long as the price in the second year is not outrageousin this case, $25 or less).
Innova Solutions is contemplating a strategy of setting a low introductory price in the first year followed by a more competitive price of $25 per copy in the second year. The following table summarizes Innova Solutions pricing options in years 1 and 2 and the corresponding demand for each year:
Innova Solutions fixed costs amount to $1,500,000 per year, and the variable costs associated with producing and distributing the software equal $1 per copy.
Required:
a. For each of the two years (and overall), calculate Innova Solutions profit under each of three introductory pricing scenarios: $25 per copy; $15 per copy; and $5 per copy. For each of the three scenarios, the price in the second year will be $25 per copy.
b. How would your answer to part (a) change if Innova Solutions fixed costs amounted to $200,000 per year and its variable costs associated with producing and distributing the software equaled $15 per copy?
c. What inferences can you draw about the wisdom of using low introductory prices (i.e., low-balling) to gain market share? Does the effectiveness of this strategy change depending on the organizations coststructure?
Step by Step Answer:
Managerial accounting
ISBN: 978-0471467854
1st edition
Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin