Suppose that you and your team are managers of a software company. The company is discussing the price of its new version of a software for managing stores in a small state. Since the product is a software, you may assume for this question that its marginal cost is zero (the cost associated to selling an extra unit is negligible). The fixed cost of this company is $500,000.

To choose the price of the new product, the owner and CEO of the company decides to hire a consulting company to forecast the sales of the product according to different scenarios and prices. The consulting company forecasts how much units will be sold for three price scenarios, as shown in the table below:

Price	#units sold (forecast)
700	800
500	1200
300	1600

Assuming that the consulting company's forecasts are correct (and can be extrapolated to a finer grid of prices), find what should be the price that your company should charge for the software. For this, do the following:

2. Copy the table above into a spreadsheet in Excel.
4. Place a line between the lines with the prices 700 and 500 and take the middle point of all values in each column. That is, you should obtain the line in blue below:

Price	Quantity Demanded
700	800
600	1000
500	1200

2. Place a also a line between 500 and 300 and do the same. Now, you have a table such that the prices are 300, 400, 500, 600 and 700. (You are just extrapolating values from the original table, so that you have more price points This method of extrapolation is not necessarily the best that can be done, but it works very well for this linear case.)
4. Repeat the procedure of creating new lines in between the ones that you have, so that you have now all prices from 300 to 700, in steps of 50s.
6. Now with two new columns: one for revenue and another for profits (using the data given above).
8. By inspection, that is, by looking at the values that you obtained in your spreadsheet, find out what is the price that maximizes revenue and what is the price that maximizes profits.
10. Are these two prices equal or different? Can you explain why?
12. Draw graphs of the revenue and profits obtained above putting in the horizontal line the quantity sold and in the vertical line revenue/profits.
14. Redo items 5-7 above for the following situation: now, when selling a license of its new product, the software company incurs a cost of $50 to pay for a technician to install the software for the client, give a short demonstration of its use and clarify any doubts. Therefore, the marginal cost of each unit sold is now $50.

Deliverables:

a. Upload a spreadsheet in Excel with the final result of the above procedures and the highest revenue and profit highlighted with color. (Make sure that you include separate calculations for the initial case with zero marginal costs and the one described in item 9 above, with $50 marginal cost.)

b. Explain in a comment of 1-4 lines with your answer to question 7 for the case of zero marginal costs.

c. Explain in a comment of 1-4 lines with your answer to question 7 for the case of $50 marginal costs.

Answer rating: 100% (QA)

To determine the optimal price for your software product follow these steps Excel Spreadsheet Analys... View the full answer