Question

You are the owner of a winter sporting goods store and recently purchased a shipment of 60 sets of snowboards and snowboard bindings at a total cost of $29,000. (You were unable to purchase separately, and the smallest order was for a set of 60.) The community in which your store is located consists of many different types of snowboarders, ranging from expert to beginners. From historical data, you know that different snowboarders value snowboards and bindings differently. However, you cannot profitably price discriminate because you cannot prevent resale (arbitrage). Market research shows there are about 20 advanced snowboarders who value snowboards at $350 and bindings at $250, 20 intermediate snowboards who value snowboards at $250 and bindings at $275, and 20 beginning snowboarders who value snowboards at $175 and bindings at $325. Compare the profits earned under the following two pricing strategies: Selling snowboards and bindings separately at the profit-maximizing prices Bundling snowboards and bindings and selling for one price

Answer 1

Answer:

Profits Comparison:

                Sold Separately       Bundled

Revenue          $32,500            $30,000

Costs                 29,000              29,000

Profits               $3,500               $1,000

The calculations show that it is far better to sell the snowboards and bindings separately at the profit-maximizing prices than bundling them and selling for one price.

This is because, if the single price is more than $500, the beginners might not buy the items and they will remain unsold.

Explanation:

a) Data and Calculations

Cost of purchase of 60 sets of snowboards and snowboard bindings = $29,000

Unit cost of a set of snowboard and binding = $483.33 ($29,000/60)

Snowboarders             Advanced    Intermediate    Beginners   Average

Number                           20                   20                   20

Snowboards                  $350              $250               $175            $258.33

Bindings                          250                 275                325            $283.33

Total                              $600              $525               $500           $541.66

Total revenue:                                                                                Total

when sold separately  $12,000         $10,500          $10,000       $32,500

Total revenue:

when bundled at a price (for example $500 for each) = $30,000 ($500 * 60)

                Sold Separately       Bundled

Revenue          $32,500            $30,000

Costs                 29,000              29,000

Profits                $3,500               $1,000