You are the manager of a Midwestern tractor factory planning to produce one of two new products, a zero-turn riding lawn mower or a compact tractor. You learned in college that setting the right price for your new product will assist you in maximizing profits while maintaining a good relationship with your customers. You expect the demand for the mower to be 100,000 units and the demand for the tractor to be 2,000 units. The annual cost of carrying these products in inventory is $50 for a mower and $100 for a tractor. 1. What are the total revenues for the mowers for each order?

a. $12,110,000
b. $11,055,000
c. $12,400,000
d. $13,065,000

2. What are the total revenues for the tractors for each order?

a. $2,410,000
b. $2,529,000
c. $2,493,000
d. $2,730,000

Question Completion:

You estimate that the average variable cost (AVC) will be $100 for the mower and $1,000 for the tractor. The total fixed cost (TFC) will be $50,000 for the mower and $100,000 for the tractor. What is the total cost of the mowers for each order?

$17,000,000

$2,100,000

$10,050,000

$1,900,000

What is the total cost of the tractors for each order?

$600,000

$5,200,000

$2,100,000

$4,100,00

2. What is the average total cost of the mowers?  

$190.28

$210.75

$100.50

$140.10

What is the average total cost of the tractors?

$1,800

$1,200

$2,000

$1,050

3. You consult with your colleagues, and you all agree that effective pricing can assist you in avoiding the serious financial problems that may occur if prices are too high or too low. If the price is high, you may price yourselves out of the market. If the price is low, you may be underpaid for your work. Consequently, you decide to employ a 30 percent markup. What is the new price of the mower?

$195.50

$230.20

$95.15

$130.65

What is the new price of the tractor?

$1,365

$2,050

$2,300

$1,000

4. What are the profits for the mower under this scenario?

$30.15

$50.20

$60.10

$25.50

What are the profits for the tractor?

$255

$520

$610

$315

5. What are the total revenues for the mowers for each order?  

$13,065,000

$11,055,000

$12,400,000

$12,110,000

What are the total revenues for the tractors for each order?

$2,410,000      

$2,529,000

$2,493,000

$2,730,000

                                   Mower                  Tractor

1. The total cost    $10,050,000          $2,100,000

2. Average cost         $100.50                   $1,050

3. Selling price           $130.65                    $1,365

4. Profit                        $30.15                    $315

5. Total Revenue    $13,065,000             $2,730,000

Explanation:

a) Data and Calculations:

                                                       Mower           Tractor

Average variable cost (AVC)           $100            $1,000

The total fixed cost (TFC)         $50,000       $100,000

Annual Demand                         100,000             2,000

Annual carrying cost/unit                 $50               $100

Total costs:                  Mower                  Tractor

Variable cost         $10,000,000         $2,000,000

                            (100,000*$100)     (2,000*$1,000)

Fixed cost                      50,000               100,000

Total cost             $10,050,000          $2,100,000

Average cost         $100.50                   $1,050

Markup  (30%)

Selling price           $130.65                   $1,365

Profit                        $30.15                       $315

Total revenue     $130.65 * 100,000    $1,365 * 2,000

=                        $13,065,000             $2,730,000