ABDT5104 PRICING STRATEGY

Tutorial 4 Answer

June 8, 2011

Question 1
The price reduction will be profitable only if an increase in monthly sales at least 33.33%. Nokia Company must sell at least 1, 333 units per month in order to maintain the same profitability of the company before price reduction; otherwise it is best Nokia maintain its current price of RM1, 000.

Question 2
CM=RM950-RM800=RM150 Change in profit = [actual unit sales change unit BE sales change] X new CM per unit = [(RM1, 400-RM1, 000) - 333unit] X RM150 = RM10, 050 New profit = RM40, 000 + RM10, 050 =RM50, 050

This is greater than the breakeven, so we expected that profitability would be positively affected. The actual sales change is 400 units and the new contribution margin is RM150, plugging those inputs in yield a change in profit o f RM10, 050. The monthly profit is RM50, 050.

Question 3
Some company choose to price cooperative because, some company does not afford to set a low price due to high costs especially these are labor intensive production with increase variable cost. Another reason is no economic of scale. Some company has small market share, the production quantity is no big enough to achieve lower cost per unit. Thus it is hard for a company to set a lower price. Last by not least, in price sensitive margin, company will not set low price. It is not appropriate to set a lower price due to intensive competition. Once a company set a lower price, other company will follow the same price to prevent customer leak out due to lower price sale. As a result, a lower profit margin be earn if company big to set lower price in price sensitive market.

ABDT5104 PRICING STRATEGY

Tutorial 4 Answer

June 8, 2011

Question 4