The product design team of Cervantes Golf Company is in the process of designing a new model of golf bag cart. The company estimates that total costs will be $30 per unit and fixed costs will be $800,000 per year.
Required:
a. Suppose the company wants to set its price equal to full cost plus 35 percent. To determine cost, the company must estimate the number of units it will produce and sell in a year. Suppose the company estimates that it can sell 8,000 units. What price will the company set?
b. Suppose the company sets a price as in part a, but the number of units demanded at that price turns out to be 6,000. Revise the price in light of demand for 6,000 units.
c. Compare the two prices you just calculated; why are the prices different? What is likely to happen to the quantity demanded if the company is forced to raise its price to the price calculated in part b?