Question

Best Buy considers Microsoft one of its most important suppliers of gaming hardware. With Microsoft XBox’s...

Best Buy considers Microsoft one of its most important suppliers of gaming hardware. With Microsoft XBox’s high brand equity, Best Buy has to make sure that they are available in its stores in order to satisfy its customers. In fact, Best Buy knows from its previous research that XBox can also help keep current customers loyal to its stores because they buy lots of high margin games.  
  
Given its high brand equity, Microsoft thinks that it can marginally increase the price for its XBox without losing market share, selling 200,000 units. To produce and market those 200,000 XBoxes, Microsoft expects to incur $20,000 in advertising and sales promotion expenses and $50,000 in compensation for a sales representative to build relationships with electronics stores. To manufacture each XBox, it costs Microsoft $75 for material and $15 for packaging. Microsoft currently sells XBoxes to Best Buy at $180 each. Using the cost-plus pricing strategy, what price should Microsoft charge Best Buy if Microsoft’s new target profit margin is 75%?

a.

87.38
b.

436.88
c.

873.75
d.

187.25
e.

410.87
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