Digital Arts Inc. manufactures game systems. Digital Arts has decided to create and market a new system with wireless controls and excellent video graphics. Digital Arts’s managers are thinking of calling this system the Yew. Based on past experience they expect the total life cycle of the Yew to be four years, with the design phase taking about a year. They budget the following costs for the Yew:

Required
1. Suppose the managers at Digital Arts price the Yew game system at $110 per unit. How many units do they need to sell to break even?
2. The managers at Digital Arts are thinking of two alternative pricing strategies.

a. Sell the Yew at $110 each from the outset. At this price, they expect to sell 1,500,000 units over its life cycle.
b. Boost the selling price of the Yew in year 2 when it first comes out to $240 per unit. At this price they expect to sell 100,000 units in year 2. In years 3 and 4 drop the price to $110 per unit. The managers expect to sell 1,200,000 units in years 3 and 4.

Which pricing strategy would you recommend? Explain.

3. What other factors should Digital Arts consider in choosing its pricing strategy?