The Precision Writing Instruments Company Makes Two Pen Designs -

The Precision Writing Instruments Company makes two pen designs - the Cordova design and the Savannah design. These data apply, regardless of which of two pen designs is being implemented. Materials cost per pen is $6. Labour cost per pen is $5. Production overhead is $1,000,000. Advertising and promotion is $1,000,000. Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price. For the Cordova design, Q = 150 - 2.5P. For the Savannah design, Q = 175 - 2.1P. A penetration strategy is proposed for the Savannah design and a price of
$25 is selected. What will be the profit or loss for the first year?

A) $306,250 loss
B) $2,112,500 profit
C) $2,222,500 profit
D) $285,000 loss

Correct Answer:

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