You are a Product Manager for your company. Your VP of Sales you drop the price
ID: 2794650 • Letter: Y
Question
You are a Product Manager for your company. Your VP of Sales you drop the price for your product by 20%. This is necessary, according to your VP, to combat a new competitor entering your market. requested that The long standing policv of vour firm is that anv price reductions have to be Gross Margin neutral. In other words, they cannot affect the $ value of the Gross Margin The most recent market research shows that your company has 70% market share. The remaining share is equally divided between two other established competitors It also estimates that the market for your products grows at the rate of 20% peryear Currently, your manufacturing plant works at 90% of capacity. That is, it produces 100,000 units per year. The revenues are $500,000 per year and the Cost of Goods Sold is $300,000. Calculate the following: a) the required change in unit sales that will keep the $ level of Gross Sales unchanged b) Gross Margin (%) after the price change c) the total market size (in units) at the end of the first yearExplanation / Answer
Current Price Required price Market Share 70% g 20% Capacity 90% Units P.a 1,00,000 Mac can produce 1,11,111 Price P.U 5 4 Cost P.U 3 3 Contribution P.U 2 1 G.P 2,00,000 2,00,000 Units to produce 2,00,000 Additional units 1,00,000 But company does not have capacity as it is operating at 90% capacity, it can produce only 111,111 units so additional units are 11,111 only which it can produce So to keep same level og gross profit at 100% capacity company can reduce the price=200000/111111+3= 4.80 so maximum reduction is 4% only (1-4.80/5) b. Gross Margin if company reduce the price by 20% at 100% capacity=111111*1=$111,111 c. The total market size at the end of first year will be =(100000/.7)*1.2=171,429 units
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