Pricing Strategy: I I O M, B

INDIAN INSTITUTE OF MANAGEMENT, BANGALORE
Pricing Strategy
INDIVIDUAL ASSIGNMENT: 1
DEC 23TH, 2010
SUBMITTED BY:
PRAVEEN R REVANKAR (0911116)

Set B:
1) Current operating profit = P-VC-FC
= 36,000*6- 36,000(4.75)*1.025-15,000-10,000-10,000
= $5725
2) What is the contribution margin of a gallon of organic milk?
Contribution margin is given by = Price – Variable Cost
Variable cost = (4+.75)*1.025= 4.86875 (accounting for the wastage)
Price 6
Variable Cost 4.86875
Contribution
Margin 1.13125
3) Construct a break-even sales curve.
% breakeven sales change = -∆P/New CM
Initial Sales 36000

Initial Price 6
% Change in Price CM Change in Price % Break Even sales change Sales not lower than Sales not lower than
-15% 0.23125 5.1 3.891891892 140108.1081 176108.1081
-10% 0.53125 5.4 1.129411765 40658.82353 76658.82353
-5% 0.83125 5.7 0.360902256 12992.4812 48992.4812
0% 1.13125 6 0 0 36000
5% 1.43125 6.3 -0.209606987 -7545.851528 28454.14847
10% 1.73125 6.6 -0.346570397 -12476.5343 23523.4657
15% 2.03125 6.9 -0.443076923 -15950.76923 20049.23077
Figure 1: Break-even sales curve
200000
180000 176108.11
160000
140000
120000
100000
Sales not lower than
80000 76658.82
60000
48992.48
40000 36000
28454.15
20000 23523.47 20049.23
0
5.1 5.4 5.7 6 6.3 6.6 6.9
The break-even sales curve is plotted for varying values of ‘Change in Price’ (ranging from -15% to +15%).
Eg: For a price change of +10%
% Break Even Sales change= -ΔP/New CM = -(6.3-6)/(6.3-4.75) = -0.3/1.55 = -34.65%

The amount of sales that Brik-Mort can afford to lose is 36000*34.65/100 = -12476
Or equivalently the new sales should be no lower than 36000 – 12476 = 23523
Set C:
1) Operating Profit = Revenue – Costs = Sales Qty * P – Total V.C – Total F.C
Operating Profit for 2 years is calculated using the above mentioned formula. The reduction of $10,000 in the labor overhead is considered
while calculating the profit for the second year. The other parameters remain same.
I Year II Year
Quantity 36000 36000
P 6 6
Revenue 216000 216000
Costs
Fixed Costs 65000 55000
Annual Labor Cost 15000 15000
Overhead allocation 10000 10000
Capital Cost allocation 10000 10000
Printer machine cost 10000 10000
labor overhead 20000 10000
Variable Costs 151200 151200

Per Unit 4.2 4.2
Operating Profit -200 9800
The loss for the I year stands at $200 vs. a profit of $9800 in the second year
2) What is then the contribution margin of a gallon of organic milk?
Using the formula Contribution margin is given by = Price – Variable Cost
I Year II Year
P 6 6
Variable cost per unit 4.2 4.2
Contribution Margin 1.8 1.8
3) What is the sales change required so that without a change in price Brik-Mort will be able to maintain the current profit level
To maintain the profit margin of $5725 obtained, we calculate the sales volume in each of the 2 years using the below mentioned formula
Sales Volume = (Fixed cost + initial profit margin)/(Contribution Margin)

Sales
volume Increase/ Decrease with
required respect to 36000
Increase
Q1 ( I year) 39291.67 3291.666667
Decrease
Q2 (II year) 33736.11 -2263.888889
Set D:
1) What is the operating profit for this alternative

Considering a sales volume of 36,000. We obtain the operating profit as
Operating Profit = Revenue – Costs = Sales Qty * P – Total V.C – Total F.C
Variable costs considers the 2.5% wastage
Quantity 36000
P 6
Revenue 216000
Costs
Fixed Costs 35000
Annual Labor Cost 15000
Overhead allocation 10000
Capital Cost allocation 10000
Monitoring Costs 0.75

Price per gallon 3.8
Variable Costs 167895
Per Unit 4.66375
Operating Profit 13105
2)
Figure 2: Profit analysis for Options C & D
120000
100000
80000
60000
Operating Profit Quantitative

40000 Operating Profit RFID I year
Operating Profit RFID II year
20000
0
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0 00 00 00 00 00 00 0 0 0 0 0 0 0 0
25 30 35 40 45 50 55 60 65 70 75 80 85 90
-20000
-40000
From the below mentioned table we see that for a sales volume of 36,000, RFID installation will lead to more profits. If the sales were to drop >
36,000, the loss on the RFID option will be more. The RFID option is profitable only when the sales figure is > 70,000 and from the second year.
If we assume that in the coming year sales will have fluctuations in the range of +/- 20%, then option D is more profitable for the company.
Therefore, the company should go for quantitative discount.
Quantitative discount RFID - I year RFID - II year

Operating
Quantit Operating Profit Profit RFID I Operating Profit RFID
y Quantitative Quantity year Quantity II year
25000 -6718.75 25000 -20000 25000 -10000
30000 -1062.5 30000 -11000 30000 -1000
35000 11768.75 35000 -2000 35000 8000
40000 18450 40000 7000 40000 17000
45000 25131.25 45000 16000 45000 26000
50000 31812.5 50000 25000 50000 35000
55000 38493.75 55000 24000 55000 34000
60000 45175 60000 33000 60000 43000
65000 51856.25 65000 42000 65000 52000
70000 58537.5 70000 51000 70000 61000
75000 65218.75 75000 60000 75000 70000
80000 71900 80000 69000 80000 79000
85000 78581.25 85000 78000 85000 88000
90000 85262.5 90000 87000 90000 97000

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INDIAN INSTITUTE OF MANAGEMENT, BANGALORE

DEC 23TH, 2010

PRAVEEN R REVANKAR (0911116)

2) What is the contribution margin of a gallon of organic milk?

Contribution margin is given by = Price – Variable Cost

Variable cost = (4+.75)*1.025= 4.86875 (accounting for the wastage)

Initial Sales 36000

Eg: For a price change of +10%

% Break Even Sales change= -ΔP/New CM = -(6.3-6)/(6.3-4.75) = -0.3/1.55 = -34.65%

Variable Costs 151200 151200

2) What is then the contribution margin of a gallon of organic milk?

Using the formula Contribution margin is given by = Price – Variable Cost

Sales Volume = (Fixed cost + initial profit margin)/(Contribution Margin)

1) What is the operating profit for this alternative

Monitoring Costs 0.75

Operating Profit 13105

Figure 2: Profit analysis for Options C & D

Operating Profit Quantitative

Therefore, the company should go for quantitative discount.

Quantitative discount RFID - I year RFID - II year

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