Question

Summit Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. At a price of $80, Summit's market research indicates that it can sell 60,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $80 price compare to what it would have earned in the absence of the competitor's product?\

Answer 1

Answer: Profit is $50,000 less.

Explanation:

The target cost as a result of the Competition is;

Summit requires 25% profit from the sales price of $80

= 80 * 25%

= $20

Target cost is;

= 80 - 20

= $60

If there was no competition, the target cost would be $65 and the sales price would be $90. They would also sell 50,000 units.

With competition, the target cost is $60, price is $80 and sales will be 60,000 units.

At a price of $90 and target cost of $65, profit = 90 - 65 = $25

At a price of $80 and target cost of $60, profit = 80 - 60 = $20

The difference = (20 * 60,000) - (25 * 50,000)

= -$50,000

Profit is $50,000 less.