Question

You are hired as a product manager at a camping product company that has developed a new lightweight, collapsible drinking cup for backpackers. You are considering two alternative prices for the product - $7.50 or $4.50. Research has estimated that at the $7.50 price the first year market will be 200,000 units, plus or minus 20%. At the $4.50 price the first year market is estimated at 600,000 units, plus or minus 30%. In either case, manufacturing costs (variable costs) will be $2.80 per unit and fixed costs for plant and equipment will be $50 thousand. Since the product will simply be added to the company's line, other expenses, such as advertising costs, will be minimal. You estimate $15 thousand at either volume level. You are trying to decide whether to use a price skimming or penetration strategy. Because you have heard that a major competitor is working on a similar unit, you are afraid that you will have very little lead time - a month or two at the most. You have filed for a patent on the product but are not sure that it is patentable. At the same time, you have to introduce the product immediately to be in the market in time for the backpacking season. Questions: 1. What are your projected sales and profits at the skimming and penetration prices? 2. What are your breakeven points for the skimming and penetration prices? 3. What decision do you make, skimming or penetration? Why? 4. What are your assumptions and considerations that led you to this decision? 5. What additional information would you like to know to make a more informed decision? Notes: Break-even = Fixed Cost/Contribution Margin Contribution Margin = Selling Price - Variable Unit Cost Guideline 1. You should submit the report in a hard-copy, using a similar format as this memo. 2. Your report should answer all five questions clearly, AND include a comprehensive break-even analysis (i.e., upper and lower bounds of estimation are considered).

Answer 1

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Estimates Sales Units unit selling price Total Revenue Skimming Strategy Medium High(+20%) 160000 200000 240000 7.5 7.5 1200000 1500000 1800000 Penetration Strategy Low (-30%) Medium High(+30%) 420000 600000 780000 4.5 4.5 4.5 1890000 2700000 3510000 7.5 2.8 2.8 2.8 2.8 2.8 2.8 Variable Cost per Variable Cost (Sales Units * 2.8) Contribution margin 560000 940000 672000 1128000 1176000 714000 1680000 1020000 2184000 1326000 752000 Fixed Cost Other costs 50000 15000 50000 15000 50000 15000 50000 15000 50000 150001 50000 15000 Answer - 1 Profit 687000 875000 1063000 649000 955000 1261000 50000 50000 Break Even Units = Fixed Cost / Contribution Margin per unit 50000 50000 50000 50000 7.5 7.5 7.5 2.8 2.8 2.8 4.5 4.5 Fixed Cost unit selling price Variable Cost per Contribution Margin Per unit Break Even Units = Fixed Cost/ Contribution Margin Answer - 2 per unit 10638 10638 10638 29412 29412 29412 Answer - 3 As major Competitor is also working on the similar units, we should follow penetration strategy because it will help us to attract more customer due to lower prices of product Assumption and consideration 1. Major consideration is that a major competitor is working on similar type of product 2. At penetration strategy level we are able to cover our Fixed cost easily at all three level (i.e. Low, medium & High) 3. Attractive prices of new product during Backpacking system will help gain more market share rather than higher selling price 4. Assumption Taken that there was no issue in patenting the product Answer - 5 Details like Quality details of competitor product. Because if competitor product is of inferior quality then we might go for skimming strategy. Clarity regarding Patenting issue