Exercise 3 – Analyzing financially the possible changes In price or volume
Apple iPhone sales in 2014 were around 150 000 000 Units with the price of 640 USD per unit. In 2015 Apple wants to introduce New model in its iPhone series. Following is the company's average costs to Manufacture one unit of iPhone (see table 1).
Table 1 – One unit iPhone Manufacturing Cost Estimates
Flash Memory & RAM
Display & Touchscreen
In table 2 there is a breakdown of Apple’s Fixed Costs that are associated to the iPhone business.
Table 2 – Apple’s Fixed Costs Associated with iPhone business
R & D
589 000 000 USD
Marketing and sales
732 000 000 USD
600 000 000 USD
Apple might enjoy stable demand with its Current pricing, but management is looking for ways to increase profitability. The board of directors is looking at two scenarios:
Scenario 1 is that company repositions its new Smartphone as a unique premium product, justifying even higher price. If Successful, the company believes that it could charge 25% more for the new IPhone.
a) What is the maximum sales Loss (in % and units) that Apple could tolerate before a 25% price increase Would fail to make a positive contribution to its profitability?
b) In order for Apple to Reposition its new iPhone as a unique premium smartphone, it will have to Upgrade the features of the product by including:
·better processor which will cost 25 USD instead Of 17,5 USD;
·better sensors which will cost 10 USD instead of 6.5 USD;
·longer lasting batteries which will cost 8 USD Instead of 4.5 USD.
What is the maximum sales loss that Healthy Spring could tolerate before a 25% price increase would fail to increase its Net profit?
c) To reposition its product, Apple will require an increase in its advertising and sales budget by 200 000 000 USD. What is the maximum sales loss That Healthy Spring could tolerate before a 25% price increase would fail to Increase its net profit? (You should Take into account the changes that happen in statements “a” and “b” of scenario 1)