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?