CLE is a small company wishing to enter the lower end of the PC market. It has a product

that has been well tested and proved reliable. To date 2,000 have been made at an average

cost per unit of £650. However, the product was aimed originally at the cheaper end of the

market and management wanted to launch at a retail price of £399 to compete satisfactorily

and to achieve adequate volume. The retailer traditionally receives a 50 per cent markup

in this product area. A market survey has already been carried out showing the share of

the cheap PC computer market (estimated total next year, 500,000 computers) that CLE

might achieve during the first year with a launch retail price of £399.

Market share %          Probability

2.5                       0.05

5                         0.1

7.5                       0.25

10                         0.35

12.5                       0.15

15                           0.1

Feelings among the directors are strong. The accountant says that the product cannot be

launched at so low a price and that a price of £600 is much more realistic. The marketing

director disagrees and says that the new product will not get any worthwhile market share

at that price. The production manager says capacity is available for only 20,000 units a year

unless £250,000 is spent on additional equipment, which would in effect double capacity.

Further capacity can be obtained by contracting out manufacture to one of several

firms whose costs are relatively low. It has been estimated that this type of product has an

80 per cent experience curve. The company has £0.5 m available in cash and bank overdraft.

Requirements

(a) Should the company launch the product at a price of £399?

(b) Provide calculations which help to assess the risk involved.