Beauregard Textile Company is assessing estimating method for its item T-30 whether it ought to charge $3 or $4 per yard. Its rival is constantly charging the $3 regardless of making misfortunes and troublesome money related condition. On the off chance that Beauregard keeps charging $4, it will have the piece of the overall industry of just 33% while $3, Calhoun and Pritchard has the piece of the pie of around 66%. On the off chance that Beauregard diminishes its cost to $3, it will pick up its clients back as a result of its area leverage, however it won't be beneficial at this cost. This entire case speaks to a circumstance of Prisoner Dilemma where both would be in an ideal situation just on the off chance that if Beauregard proceeds with its cost of $4 while Calhoun and Pritchard additionally build its cost to $4. In this circumstance, business sector size would be diminished by around 20%, yet both these organizations would make benefits.
However, when utilizing the current cost model and sales figures, the full case study cost analysis at each price point shows there was no value gained in raising the price above $3 per yard and should reduce their price to the previous level.
Price StrategiesB - 4, CP - 3 B - 3, CP - 3B - 4, CP - 4 VC - Direct Labor0.8000.7600.780
VC - Material0.4000.4000.400
VC- Material Spoilage0.0400.0380.040
VC - Indirect labor, supplies, repairs, power, ...0.1200.1000.112 Total Relevant Variable Cost1.3601.2981.332
Contribution Margin per Yard2.6401.7022.668
When the expenses not related to the sale of T-30 are excluded and our cost analysis shows a more desirable result and again, shows there is no need to raise the price above $3 per yard unless Beauregard was able to convince Calhoun and Pritchard to follow suit, which so far has been unsuccessful by increasing their sales figures and profit margins by the price conscious consumers switching to a comparable product. Calhoun and Pritchard presumably are showing a loss of $3.00. Why then is it not raising its price?
Assuming a similar cost structure to Beauregard, Calhoun and Pritchard are most profitable when undercutting Beauregard's higher pricing by the increased volume of T-30 sold. It is in Calhoun and Pritchard's best interest for Beauregard to continue selling T-30 at $4 per yard. When we look only using the variable cost associated with the production of T-30, as suggested in Exhibit 4, Calhoun and Pritchard are able to sustain a $3 per yard price without any additional line by line cost cutting analysis so long as Beauregard continues to charges $4 per yard. Additionally, it is unlikely that Calhoun and Pritchard are using the same accounting practices or sales incentives as Beauregard, which enables them to remain confident in their current pricing scheme.
Exhibit 5 - Calhoun and Pritchard Current Cost Analysis (Beauregard @ $4) Sales Volume150,000
Total Sales @ $3$450,000
Indirect labor, supplies, repairs, power, Ö$10,000
Total Variable Cost$127,800
Income before Administrative Expenses$322,200
General Overhead (30% direct labor)$22,200
Selling & Admin (65% factory cost)$83,070
Depreciation, Supervision, etc.$40,000
Total Administrative Expense$145,270
What happens to Calhoun and Pritchard if Beauregard drops its price to $3.00?
With Calhoun & Pritchard using the sequential-move game theory, their max profits are realized when they are able to capture the majority of the market share which occurs when Beauregard charges $4 per yard. Using the gaming analysis in Exhibit 6, it shows that Calhoun and Pritchard's dominate strategy is to charge $3. While both firms reach the highest level of profitability at $4 per yard, the market for T-30 is reduced by 20% which makes it more likely for one of the firms to look for the competitive advantage by dropping their price to capture those lost sales.
Exhibit 6 - T-30 Gaming Analysis
Gaming AnalysisC&P @ 3C&P @ 4
Beauregard @ $3375,000, 300,000600,000, 100,000
Beauregard @ $4300,000, 450,000400,000, 320,000
In Exhibit 7, when Beauregard charges $3 per yard, Calhoun and Pritchard show a loss using the same cost analysis. In order for Calhoun and Pritchard to be profitable using this cost analysis when both companies charge $3 per yard is to cut cost in the Selling/Administrative/Overhead variable expenses and convert depreciation and supervision costs to a fixed structure.
Exhibit 7 - Calhoun and Pritchard Current Cost Analysis (Beauregard @ $3) Sales Volume100,000
Conclusions, Recommendations, and/or Concerns
By setting the price at or exceeding full cost does not always assure company profitability nor does it guarantee that a company's profits will be maximized. For Beauregard to reach their optimal cost structure, expenses need to be analyzed line by line. Suggested cost savings and an alternative accounting methodology are shown in Exhibit 8 which shows Beauregard could continue to charge $4 per yard and cover the full cost of their product's output in the hopes that Calhoun & Pritchard eventually follow suit. However that seems unlikely given Calhoun and Pritchard's dominant strategy to charge $3 per yard and the 20% decline in sales both firms would expect at the higher rate. Therefore Beauregard's most profitable move is the lower their current price of $4 per yard to the previous level of $3 per yard and investigate the below cost cutting recommendations. ēAdjust the Indirect Department Expenses to fixed cost accounting for depreciation and supervision constant over the full range of production at least.......
Quarterly Prices and Sales Volumes for T-30 Fabric, 1988-1990
Beauregard’s Estimated Cost per Yard of Triaxx-30 at Various Volumes of Production
Contribution Margin Calculations
Case 1Beauregard Textile Company drops its price to $3 for 4th Quarter
Case 2Beauregard Textile Company Keeps its price to $4 for 4th Quarter
Case 3Beauregard Textile Company Keeps its price to $4 for 4th Quarter while Calhoun and Pritchard raises its prices to $4
Case 4Beauregard Textile Company Keeps its price to $3 for 4th Quarter while Calhoun and Pritchard raises its prices to $4