Exercise Four $(10$ Points$)$:

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:

Suppose the managers at Digital Arts price the Yew game system at $90\%$ of its variable cost per unit. How would

be the price of one unit of Yew game system?

The managers at Digital Arts are thinking of two alternative pricing strategies.

a$.$ Sell the Yew at $$90$ each from the outset. At this price, they expect to sell $1,680,000$ units over its

life cycle.

b$.$ Boost the selling price of the Yew in year $2$ when it first comes out to $$110$ per unit. At this price,

they expect to sell $1,060,000$ units in year $2.$ In years $3$ and $4,$ drop the price to $$90$ per unit. The managers

expect to sell $325,000$ units in years $3$ and $4.$

Which pricing strategy is recommended? Explain.

$($a$)$

$($b$)$

The company should choose:

A$.$ Option A because it results in overall higher variable costs over the product's life cycle.

B$.$ Option A because it results in an overall higher operating income over the product's life cycle.

C$.$ Option B because it results in an overall higher operating income over the product's life cycle.

D$.$ Option B because it results in overall higher variable costs over the product's life cycle.

Answer: