Winchester Manufacturing, Inc., plans to develop a new industrial motor. The product will take 6 months to design and test. The company expects the motor to sell 10,000 units during the first 6 months of sales; 20,000 units per year over the following 2 years; and 5,000 units over the final 6 months of the product’s life cycle. The company expects the following costs:

Ignore the time value of money.
1. If Winchester prices the motors at \($375\) each, how much operating income will the company make over the product’s life cycle? What is the operating income per unit?
2. Winchester is concerned about the operating income it will report in the first sales phase. It is considering pricing the motor at \($425\) for the first 6 months and decreasing the price to \($375\) thereafter. With this pricing strategy, Winchester expects to sell 9,500 units instead of 10,000 units in the first 6 months, 19,000 each year over the next 2 years, and 5,000 over the last 6 months. Assuming the same cost structure given in the problem, which pricing strategy would you recommend? Explain.

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Total Fixed Cost Variable Cost Period Cost for the Period per Unit Months 0-6 Design costs $ 500,000 Months 7-12 Production $1,300,000 $90 per unit Marketing $1,000,000 Distribution $ 200,000 $10 per unit Months 13-36 Production $4,900,000 Marketing $2,325,000 Distribution $ 700,000 Months 37-42 Production $ 800,000 Marketing $ 475,000 Distribution $ 100,000 $70 per unit $ 8 per unit $60 per unit $ 7 per unit