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Chapter 4

Q. 4.6

NetLaw provides computer networks and related data storage for law firms. The hardware, software, and other variable costs are €100,000 per installation. The fixed costs of operating NetLaw are €1 million. The president of NetLaw estimates the following levels of sales given different prices:

Price Expected Sales
€ 150,000 50
175,000 44
200,000 30
225,000 20

What price per installation should be set by the president to maximize the value of NetLaw?


Verified Solution

The revenues and costs for the different levels of production are:

Price Expected Sales Total Revenues Total Costs Added Value
€ 150,000 50 €7,500,000 €6,000,000 €1,500,000
175,000 44 7,700,000 5,400,000 2,300,000
200,000 30 6,000,000 4,000,000 2,000,000
225,000 20 4,500,000 3,000,000 1,500,000

Installing 44 network systems for €175,000 apiece is the preferred strategy.