Paper Towels. Jimmie works for Procter & Gamble in Bounty brand management. US B
ID: 1169534 • Letter: P
Question
Paper Towels. Jimmie works for Procter & Gamble in Bounty brand management. US Bounty sales are $2 billion per year at a wholesale price of $2 a roll. Jimmie's market research says that if P&G; offers a 20% price reduction for the next six months, 25% more rolls will be sold for the next year. Each roll costs P&G; $1.00. The associated advertising campaign will cost $0.20 billion. P&G; has a discount rate of 1% per month. Figure this whole problem on a monthly basis instead of an annual basis. Should Jimmie reduce the price of Bounty?Explanation / Answer
annual sale of $ 2 billion means at price of $ 2 means 1 billion of rolls are sold annually
that means monthly , 83.33 million towel are sold
if price is reduced by 20%, that means new price will be $ 2*(1- 0.2) =1.6
at this new price, 25% more roles will be sold , new sales = 1 billion 25 million or 1.25 billion
monthly sales= 104.16 million
cost of each roll is $1 per roll
and advertising cost = $0.20 billion= 200 million
in order to anlayse whether firm will reduce the price or not, cost benefit analysis needs to be done:
discount rate is given to be 1% , so the present values will be calculated on the basis
at given pice of $2 , profit will be of $ 0.8 bilion per year at present
and $ 66.66million per month
at reduced price , profil will be = revenue- cost of roll - cost of advertising
= 1.25 billion * $ 1.6- 1.25 billion* $1 - 0.20 billion
= $0.55 billion
that means= profit of 45 .83 miilion per month
present value of this profit= 45.83 million/ (1+.01)= $45.37 million and
so firm will eearn profit of $ 45.37 million instead of $ 66.66 million per month at present
so jimmy will not reduce price
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