Assignment Task

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

Harbor East 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.

Harbor East protects and maintains the shine of a car`s finish at least 20% longer than regular car wax. It needs 2 hours to apply Harbor East, 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, Harbor East removes the oxidation and shines the car`s surface in one step.

Harbor East can also be applied directly to a car`s surface that is already highly oxidized.

1) Estimate the EVC of Harbor East 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 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. Optimal Pricing After spending 10 years and $1.5 billion, you finally have gotten Food and Drug Administration approval to sell your new patented wonder drug which reduces the ache and pain associated with aging joints. You will market his drug under the brand name PowerAge. Market research indicates that the elasticity of demand of PowerAge is -1.25 (at all points on the demand curve). You estimate the marginal cost of manufacturing and selling one dose of Ageless at $1.

• What is the profit-maximizing price per dose of PowerAge?
• Would you expect the elasticity of demand you face for PowerAge to rise or fall when your patent expires?

4. Incremental Break-even analysis PQR manufactures and markets home video equipment. One of the most popular items in the company’s 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)?

5. Price Discrimination - Location Carey’s satellite company broadcasts TV to subscribers in Baltimore and DC. The demand and marginal revenue are below. The TC of providing Q units of service is given by TC = 1000 + 30Q. In other words, this means maginal/variable cost = 30. Also, PDC = 150 - 3QDC PBaltimore = 120 – 3/2QBaltimore.

What are the profit maximizing prices and quantities for Baltimore and DC markets? What would happen if people in Baltimore were able to receive Carey’s DC broadcasts and vice versa due to a new improved satellite?