Week 5
Assignment
Price Quotes and Pricing Decisions Applied Problems. Please,
complete the following 3 applied problems in a Word or Excel document. Show all
your calculations and explain your results. Submit your assignment in the drop
box by using the Assignment Submission button.
Maxim Motronics A.G. have been marketing a new product in
Europe that has achieved notable market success and it now plans to introduce
this product into the United States market. The product is an electronic device
that is mounted in the rear window of passenger cars and allows the driver of
one vehicle to have a spoken message converted to text and scrolled across the
display panel to be read by occupants of a following vehicle. This new product
can utilize the hands-free telephone microphone already installed in many new
vehicles, or provides this as free accessory. Maxim expects that demand will be
slow at first but will pick up quickly as automobile accessory stores begin to
stock the product and as word-of-mouth promotion spreads awareness. Maxim also
plans to produce a humorous video for posting to YouTube and to utilize
social-media marketing to spread awareness and enthusiasm for the new product.
Market demand estimates provided by Maxim are that the firm expects to sell
about 125,000 units into the U.S. market within 24 months, and that sales per
month will start slowly and increase monthly in the expected diffusion pattern
until they stabilize at about 10,000 per month after month 24. The diffusion
curve parameters that fit these assumptions are shown in the equation + 46.11T2
– 1.352T3, where Q is sales per month and T is the number of months after the
launch into the US market. Maxim’s average variable cost (AVC) is constant at
$62 per unit and he expects to set the profit-maximizing price by applying a
167% mark-up to arrive at his regular price of $165, since he estimates the
demand curve to be – 0.02Q.
a. What introductory price do you recommend Maxim sets for
the launch of the product into the US market, and why? (State any assumptions
you need to make).
b. How might he further adjust the price before raising it
to the regular level he envisions? (Again, state any assumptions you need to
make.)
c. What is your advice for Maxim concerning the confirmation
of his prior projections of demand and the shape of the diffusion curve, and
the profit-maximizing price, after this new product gains some months of
experience in the U.S. market?
2. Your company, Bright Paints, is one of a dozen companies
manufacturing a special reflective paint used for traffic signs. The State
Department of Transportation has called for tenders to supply 10,000 gallons of
blue reflective paint to be delivered within two months. You can foresee
fitting in a production run of the blue paint and have decided to bid on the
job. You calculate your incremental costs for this job to be $76,200. This
particular contract is standard, similar in all in respects to hundreds of
contracts you have bid on over the past few years. Your pricing policy has been
to apply a mark-up to incremental costs to arrive at the bid price. Your
mark-up has been higher when you had plenty of orders and lower when you had
few or no orders to fulfill. You have assembled data relating the mark-up rate
used and the percentage of contracts won at each mark-up rate, as follows.
a. Why would your company have bid with a zero mark-up on
some past tenders? Why didn’t it win all of those contracts?
b. What is the bid price that maximizes the expected
contribution of the contract?
c. Why, or why not, is the fixed-price mode of bidding
likely to be the best one to use for this contract?
3. In calculating the incremental cost of a particular project,
how would you treat the possible future costs of a lawsuit that may occur as a
result of this project, where the cost of the lawsuit might range from $10,000
to $500,000 with an associated probability distribution?
