Amazon’s new tablet computer, the Kindle Fire, has slim margins at its $199 retail price. Admittedly, this product is trying to change the way we read books. It is therefore positioned so as to penetrate a revolutionary new target market, the twenty some things who are comfortable never actually holding hard copies of their textbooks, novels, newspapers, or magazines.
Listed here is data on hardware components, software licensing, and other costs: dis- play screen $35, touch screen $25, assembly labor $11, battery $12, processor chip $18, advertising campaign $7, DRAM memory chip $5, software licenses $37, 8 GB memory module $8, wireless WiFi/Bluetooth $6, hardcase and other materials $34, R&D expense $12, overhead $14.
Questions
1. Categorize the listed costs as variable or fixed and calculate a contribution margin percentage defined as the net price minus variable costs as a proportion of the net sales price.
2. Would you expect the Kindle tablet contribution margin percentage to exceed handset margins of 13 percent to 17 percent at Samsung, RIM, and Nokia? Why or why not?
3. What about Apple iPads? Why would their margins be higher? Be specific.