Apple Inc. produces a number of mobile telephone products. It is an established company with a good reputation that has been built on a well-engineered, reliable and good quality products. It is currently developing a product called iPhone and has spent TZS 1.5 million on development so far. It now has to decide whether it should proceed further and launch the product in one year's time. If Apple Inc. decides to continue with the project, it will incur further development costs of TZS 0.75 million straight away. Assets worth TZS 3.5 million will be required immediately prior to the product launch, and working capital of TZS 1.5 million would be required. Apple Inc. expects that it could sell iPhone for three years before the product become out of date. It is estimated that the first 500 iPhone produced and sold would cost an average of TZS 675 each unit, for production, marketing and distribution costs. The fixed costs associated with the project are expected to amount to TZS 2.4 million (cash out flow) for each year the product is in production. Because of the cost estimates, the Chief Executive expected the selling price to be in the region of TZS 950. However, the Marketing Director is against this pricing strategy, he says that this price is far too high for this type of product and that he could sell only 6,000 units in each year at this price. He suggests a different strategy, setting a price of TZS 425, at which price he expects sales to be 15,000 units each year. Apple Inc. has found from past experience that a 70% experience curve applies to production, marketing and distribution costs. The company's weighted average cost of capital (WACC) is 7% a year. a) The Chief Executive has asked you to help sort out the pricing dilemma.
Discuss other issues that Apple Inc. should consider in relation to the two pricing strategies.
