Lavish Inc. is a young and successful Southern California-based company. It manufactures highly sophisticated components
Posted: Mon May 02, 2022 8:06 am
Lavish Inc. is a young and successful Southern
California-based company. It manufactures highly sophisticated
components that are used in both fixed line and cellular telephony.
The relevant basic data on costs and market conditions for its ICX
switch in the U.S. are the following (these data refer to a batch
consisting of 10,000 units of the ICX):
i) Incremental (or marginal) costs of producing, shipping and
selling an additional batch is equal to $75,000.
ii) Fixed annual costs (production, marketing, administrative
and so on): $30,000,000.
iii) Past experience has shown that the U.S. market for this
type of switch is quite sensitive to price changes. After seriously
researching the issue, the company’s marketing department has
concluded that if the price increases (decreases) by 1%, sales will
decline (increase) by 2%. Detailed and careful statistical and
technical analyses have confirmed that in the U.S. the company
faces a price elasticity of demand equal to –2.
In the U.S. the company charges $120,000 per batch, and last
year total sales amounted to 4,000 batches. Last year total
revenues were $480 million and total costs were $330
million.
a) Review the pricing model(s) being used in the US. What can
you find out – is the firm setting the optimal price and output
level?
b) What additional type of information would you like to
have in order to undertake a more complete analysis?
California-based company. It manufactures highly sophisticated
components that are used in both fixed line and cellular telephony.
The relevant basic data on costs and market conditions for its ICX
switch in the U.S. are the following (these data refer to a batch
consisting of 10,000 units of the ICX):
i) Incremental (or marginal) costs of producing, shipping and
selling an additional batch is equal to $75,000.
ii) Fixed annual costs (production, marketing, administrative
and so on): $30,000,000.
iii) Past experience has shown that the U.S. market for this
type of switch is quite sensitive to price changes. After seriously
researching the issue, the company’s marketing department has
concluded that if the price increases (decreases) by 1%, sales will
decline (increase) by 2%. Detailed and careful statistical and
technical analyses have confirmed that in the U.S. the company
faces a price elasticity of demand equal to –2.
In the U.S. the company charges $120,000 per batch, and last
year total sales amounted to 4,000 batches. Last year total
revenues were $480 million and total costs were $330
million.
a) Review the pricing model(s) being used in the US. What can
you find out – is the firm setting the optimal price and output
level?
b) What additional type of information would you like to
have in order to undertake a more complete analysis?