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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?

Step-by-Step

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.