Pricing Strategy

HomeworkAssignment 2 for MGMT 156 (Pricing Strategy), Winter 2018

1. Consider Champion Manufacturing’s pricing problem for a new project: Suppose it has
estimated its total fixed costs (costs of renting land, maintenance of facilities etc.) at $30,000. Its
variable unit cost (costs of raw material, labor going into producing each unit of Champion’s
products) is estimated to be $60 per unit.

(a) Suppose Champion estimates demand for its product to be 1000 units. It decides to

implement a 5% mark-up when deciding on the price per unit of its product. Calculate the
price per unit.

(b) Using the price per unit obtained in (a), derive the break-even quantity that Champion
Manufacturing needs to sell. Comparing to the estimated demand in (a), would you say the
mark-up that Champion used above makes the new project profitable or not?

2. Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from
the manufacturer.

(a) What is the initial contribution margin?

(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in
sales required to maintain its profitability?

(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of
the blenders to $59 to improve profit. What is the break-even change in sales permissible to
again maintain its profitability?

(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve
for the retailer.

(e) Suppose the retailer’s market research team determines that the elasticity of demand for
consumers of blenders is – 1.5. What does this imply about the actual demand for blenders
in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand
curve alongside the break-even curve to show the difference between the two curves.

(f) Can you make recommendations to the retailer regarding which strategy makes more sense:
a 33% price cut or a price rise to $59 from its current price level of $54?

3. XCELL Printing has created a new cartridge for 3D printers that they claim is far superior to the

closest alternative cartridge sold by MM Printing. XCELL is in the process of selecting a price for
the cartridge and wants to learn what the cartridge will be really worth to customers who are

manufacturing firms. The MM cartridge sells for $200. While the MM cartridge breaks down
with a probability of 40% after every 500 print jobs on a 3D Printer, the XCELL cartridge breaks
down with a probability of 30% after every 900 print jobs. Every fix in case of a breakdown
requires an hour of labor cost and also a material cost of $5. The XCELL cartridge requires a
higher quality plastic compared to the MM cartridge. Suppose you are told that the cost of
plastic amounts to $10 per carton for XCELL and $8 per carton for MM, and typically a customer
would need to reorder a carton every 450 print jobs. Also, you are told that $20 is the hourly
rate for labor hired by the typical manufacturing firm. Also, on the average, a manufacturing
firm does 4500 print jobs in a year. Suppose the lifetime of a cartridge is 1 year. Calculate the
total economic value of the XCELL cartridge.

4. Recall the steps required in calculating the total economic value of a product. Choose a product

and brand that you typically purchase. Provide a list of drivers for that product that matter for
you. Include both monetary and psychological drivers in that list. Next, identify a reference
brand and describe your perceived points of differentiation for your chosen brand for each of
the drivers you have mentioned before. Describe any advice you would provide the marketer of
your chosen brand for its marketing strategy to influence your perceived benefits and perceived
value of the brand.

5. Lily Valley Soaps manufactures fancy handmade scented soaps. It is interested in the price

elasticity shown by the consumers of its lavender rose variety of soap. It has historical sales data
for past two years of the number of bars of soap it has sold, the price of each bar and the
number of retail outlets that have put the lavender rose variety of the soap on display for sale.
Its current sales, price of each soap bar and number of retail displays are the following:

Variable Average Value
Bars of lavender soap sold 2500
Price of each bar of soap $1.60
Number of retail displays 170

Suppose it carries out a regression analysis on its historical data and obtains the following
output:

Coefficients
Standard

Error t Stat P-value
Intercept 7380 1348.81 5.47 0.00

Price -1261.21 186.77 -6.75 0.00
# of
Displays -6.36 7.82 -0.81 0.43

(a) Based on the regression output provided above, what relation can you infer between Lily
Valley’s sales of the lavender rose variety soap and the price and number of retail displays of
the soap?

(b) How do you interpret the sign of the coefficients for the price and number of retail price in
the regression analysis? Give an economic explanation for the signs.

(c) What is the price elasticity of demand for the lavender rose variety at the current sales and
pricing point?

(d) Using your answer in (c) above, can you suggest what kind of strategy (price cut or price
rise) that Lily Valley should consider?