1. Read the mini-case.
2. Answer the multiple choice questions by selecting the correct answer.
3. Show all your work when requested.
John’s company currently has a 40% share of a 1 million unit market. The current price for his product is $100, but in a direct attempt to gain market share from a competitor, he is considering lowering the price of his company’s product by 10% in an attempt to increase market share to 50%. Marketing expenses and cost per unit will remain at the level of 15% of gross profit and $70, respectively.
1. Assuming no competitive response and that the price cut resulted in a market share increase to 50%, what would the impact be on net marketing contribution as a result of this action? Show your work.
a) an increase of 12.5%
b) a decrease of 20%
c) a decrease of 17%
d) no net change in net marketing contribution
e) not enough information to determine the impact on net marketing ...view middle of the document...
00 $90.00 =100-(100*0.1)
u) 37 Variable Selling Price/case $70.00
v) 38 Marketing&Sales Expense $75,000.00 $75,000.00 =(D34*D35)*0.15
x) 40 Sales Revenue $45,000,000.00 D18*D19*D20
y) 41 Cost of Goods Sold $35,000,000.00 =D18*D19*D21
z) 42 Percent Margin 0.22 =(E24-E25)/E24
aa) 43 Net Marketing Contribution (NMC) $9,925,000.00 =D34*D35*100*(1-0.1)*E42-D38
cc) Net Marketing Contribution Difference -16.88 =((E43/E27)-1)*100 C) A decrease of 17%
2. A consultant hired by John recommended that, instead of reducing price, he consider an oblique strategy. Describe specific actions you would suggest if you were considering such strategy.
Smith Automotive is a company that produces component parts for automobile engines. They have a product that is new to the OEM market (the Original Equipment Manufacturer market has no intermediaries) and are trying to determine an appropriate price. Smith Automotive has an available production capacity of two million units per year, a cost per unit of $5.00 at that level of capacity and fixed manufacturing expenses of $5 million per year.
3. If Smith Automotive wants to achieve a 30% profit, calculate the lowest price at which Smith Automotive could sell this product and still achieve this profit objective. Show your work.
a) $1.07 per unit
b) $10.00 per unit
c) $10.70 per unit
d) $11.50 per unit
e) $25 per unit
4. If Smith Automotive calculates the lowest price at which it could sell its new product and still achieve a 30% gross profit, which cost-based pricing strategy is being used to calculate the price? Circle or fill in the blank space (10 points).
Plus-one pricing or Low-cost leader pricing or __________________________
What pricing strategy would you suggest instead? Why?
5. Smith Automotive determined that, for their product offering and the market to which they are selling it, the Ease of Switching Index and the Supply/Demand Index are both less than 1.0, meaning that it is difficult for buyers to switch and that it is a seller’s market. This indicates that Smith’s price is _____.
c) moderately elastic
d) very elastic
e) unit elastic