Brooks, Inc., develops and manufactures kitchen gadgets that it then sells through infomercials. Currently, the company is designing a cookie press that it intends to begin manufacturing and marketing next year. Because of the rapidly changing nature of the kitchen gadget industry, Brooks management projects that the company will produce and sell the cookie press for only 3 years. At the end of the product’s life cycle, Brooks plans to sell the rights to the cookie press to an overseas company for $ 125,000. Cost information concerning the cookie press follows:

For simplicity, ignore the time value of money.
1. Suppose the managers at Brooks price the cookie press at $ 20 per unit. How many units do they need to sell to break even?
2. The managers at Brooks are thinking of two alternative pricing strategies.
a. Sell the press at $ 20 each from the outset. At this price, the managers expect to sell 175,000 units over its life cycle.
b. Increase the selling price of the cookie press in year 2 when it first comes out to $ 25 per unit. At this price, the managers expect to sell 72,000 units in year 2. In years 3 and 4, drop the price to $ 15 per unit. The managers expect to sell 100,000 units each year in years 3 and 4. Which pricing strategy would you recommend?Explain.

Transcribed Image Text:

Total Fixed Costs over Four Years $450,000 $120,000 70,000 Variable Cost per Unit Year 1 Years 2-4 Years 2-4 Design costs Production costs Marketing and distribution costs $10 per unit $2 per unit