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Pricing (Electronic copy with your name on the top)

Homework #1

1. Pricing Practice
A pizza parlor sells its large pizza at $15 each. At that price, the current sales are 1,000
units per week. The variable cost per unit is $5. The management is considering the
proposal of running a 20% price promotion. Please answer the following questions:

1) How much do the sales of large pizza have to increase for the price promotion to be
profitable, if the cost structure for the parlor does not change due to the promotion?

2) Suppose now that the management believes that it is necessary to spend $400 to
advertise the price cut to its customers, how much do sales have to increase now for the
price cut to be profitable?

3)To make the problem even more realistic, suppose now that 40% of the customers who
buy a large pizza also buy a six-pack of coke (the rest of customers do not buy anything
else), from which the pizza parlor makes a dollar net profit, how much do sales have to
increase now for the price cut to be profitable?

2. EVC analysis
Miracle Shield Auto Finish is the best car polish and paint protection available anywhere.
It is a substitute for regular wax and sold in a bottle that is adequate for one application to
one car. Regular wax, which is sold in a container that is enough for two applications,
costs about $4.00/container.

Miracle Shield protects and maintains the shine of a car's finish at least 20% longer than
regular car wax. It needs 2 hours to apply Miracle Shield, the same as regular wax. The
labor cost is $5.00 per hour.

Some cars have oxidized paint (no shine) at the time wax is to be applied, requiring
cleaning with an oxidation cleaner before one can apply regular car wax. Oxidation
cleaner costs $2.50 per bottle (good for one application) and needs 2 hours to be applied.
However, Miracle Shield removes the oxidation and shines the car's surface in one step.

Miracle Shield can also be applied directly to a car's surface that is already highly
oxidized.

1) Estimate the EVC of Miracle Shield Auto Finish for consumers whose cars require
cleaning with an oxidation cleaner before applying regular car wax and consumers whose
cars do not require an oxidation cleaner.

2) There are a number of factors that influence price sensitivity other than EVC.
Consequently, it may the case the customers would not be willing to pay as much as this
product is really worth. Please identify at least two other factors that could influence how
much people would be willing to pay for this product and briefly state the marketing
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effort you can make to influence their willingness to pay or price sensitivity. Please refer
to the textbook on the 8 factors affecting price sensitivity.

3. Incremental Break-even analysis
PQR manufactures and markets home video equipment. One of the most popular items in
the companys product line is a video tape player at $250 each. Sales have been growing
rapidly and are expected to reach 4,800 units in the next year if the price remains
unchanged. Variable costs are $112.50 per unit.

Despite its projected growth in sales at the current price, PQR is considering a 5% price
cut to remain competitive and retain its share in this rapidly growing market. Since the
cut would be implemented in the next year, the initial sales level, or baseline is next
year's projected sales (4,800 unites).

Production capacity is currently limited to 5,000 units but can be increased by purchasing
equipment which costs $15,000 for each additional 1,000 units of capacity.

1). Calculate the total contribution before the price cut and after the price cut assuming
total sales volume stays the same (4,800 units).

2). Calculate the breakeven sales (units and percentage) for a 5% price cut assuming there
is no change of relevant variable cost.

3). Suppose the variable cost is decreased by $12.5. Given that PQR can manufacture
home video equipment at a lower variable cost, the management is considering a 5%
price cut. By how many units sales has to change to maintain the same profit (the
baseline case is P1=250 and S1=4800)?