A Scandinavian wind turbine manufact urer is attempting to understand the profit

Question

A Scandinavian wind turbine manufact urer is attempting to understand the profit impact of a price change on turbines. Currently a 1.5 megawatt wind turbine has a total price of $1.7million to an electric generator but faces only 1.3 million in marginal cost to deliver. ? What is the initial gross margin?

? A 3% price cut is being considered, what would be the new price and the volume hurdle to be cleared for the price change to improve profits? ?

A 3 % price increase is being considered, what would be the new price and what would be the allowable loss in sales volume for the price change to improve profits? ?

For discussion : A US competitor is selling comparable turbines for $1,675,000: they have only 20% of the market where the Sc andinavian manufacturer has 50%. In consideration of the competitors price should the Scandinavian manufacturer raise or lower prices by 3%

Explanation / Answer

1) Initial gross margin = (1.7 - 1.3) / 1.7 = 23.53%

2) New price = 1.7 * (1 - .03) = 1.649 Million OR 1649000

Gross margin % = (1.649 - 1.30) / 1.649 = 21.164%

Volume hurdle to be cleared for the price change to improve profits:

New required sales = (1.70 - 1.30) / 21.164% = 1.89 Million

% impact on sales = (1.89 - 1.70) / 1.70 = 11.18%

Volume has to be raised by 11.18% to clear the hurdle due to price change to improvise profits.

3) New price = 1.7 * (1 + .03) = 1.751 Million OR 1751000

Gross margin % = (1.751 - 1.30) / 1.751 = 25.757%

Allowable loss in sales volume for the price change to improve profits:

Required sales value = (1.70 - 1.30) / 25.757% = 1.5529759 Million

% impact on sales = (1.70 - 1.5529759) / 1.70 = 8.648%

Allowable loss in sales volume for the price change to improve profits = 8.648%

4) Scandinavian is already hight by almost 1.5% than competitor. Further 3% increase in price may hurt its market share. It will be a big increase and total difference after this increase will become 4.5% therefore company should not increase its price. On the other hand, company should align its price to competitor's price and should reduce its price by 3% and its expected that volume will increase after this price reduction and company profitability will also go up with this price redction.

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