Pricing Excercise

1– Apple, Inc. is launching it’s next version of iPhone, the iPhone X, and needs your help to determine how to price the phone.

Here are some facts related to the iPhone costs, sales and investment:

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– The unit cost to produce and sell an iPhone is $150.
-Apple wishes to make a 40% return on iPhone sales.
– Apple wishes to make a 70% return on the $850 million in capital invested in producing and selling the iPhone.
– Historically, a 10% increase in the price of the iPhone has led to a 14% decrease in the demand for iPhones.
– Apple expects to sell 10 million IPhone X units.

a. Using the Markup Pricing formula, what price should Apple charge for its iPhone X?
b. Using the Target-Return Pricing formula, what price should Apple charge for its iPhone X?
c. Calculate the Price Elasticity of Demand for iPhone X using the historical iPhone demand/pricing data.
d. Calculate the profit-maximizing price Apple should charge for its iPhone using the “Profit-maximizing Price” formula and the price elasticity of demand coefficient you calculated in c. Assume unit cost is all variable cost.
e. An experience curve analysis predicts that one year from now, it will cost $120 to produce and sell the iPhone X. Price elasticity of demand is also expected to double from its original value since the phone is now one year old and somewhat less desirable. Using the “Profit-maximizing Price” formula, what price should Apple expect to charge for its iPhone X one year from now?

2–Toyota is launching it’s next version of the hybrid Prius model and needs your help to determine how to price the car.

Here are some facts related to the Prius cost structure and expected sales volume:

– The variable cost to produce and sell one Prius car is $12,000.
– The annual fixed costs associated with Prius production and sales are $500 million ($500,000,000)
– Toyota expects to sell approximately 400,000 new Prius cars.

a. Using the “Cost-Volume-Profit” pricing formula, what price Toyota must charge in order to break even on sales of its new Prius model?
b. Using the “Cost-Volume-Profit” pricing formula, what price Toyota must charge in order to achieve annual profits of $2 billion with its new Prius model?
c. Assume Toyota intends to price the new Prius model at $25,000 per unit. Using the “Cost-Volume-Profit” pricing formula, calculate the number of Prius models Toyota needs to sell in order to break even (i.e. make zero profits).
d. Assume again that Toyota intends to price the new Prius model at $25,000 per unit. Using the “Cost-Volume-Profit” pricing formula, calculate the number of Prius models Toyota needs to sell in order to earn annual profits of $3 billion?

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