Innova Solutions has developed a software product that enables users to electronically prepare and file their state and federal tax returns. Innova Solutions has asked for your help in pricing this product. Preliminary market research indicates that if Innova Solutions prices its tax software at $25 per copy, then it will sell 75,000 copies in the first year.
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 outrageous€”in 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., €œlow-balling€) to gain market share? Does the effectiveness of this strategy change depending on the organization€™s coststructure?

Price Druand Price Demand year)ar)ar 2) (year 2) 75,000 25 75,000 $15 150,000 25 150,000 $5 300,000 25 300,000 $25 9