You are a Product Manager for your company. Your VP of Sales you drop the price
ID: 361712 • 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
1. Previous Gross Sales = $5,00,000
Previous Units Produced = 1,00,000
Cost of Good Sold = $3,00,000
Cost Price of 1 Unit = 3,00,000/1,00,000 = $3
Selling Price Per Unit = $5,00,000/1,00,000 = $5
New Selling Price = 80% of previous selling price = 0.8*5 = $4
Assuming New Number of Units produced = x
To maintain $ level of Gross Sales :
5,00,000 = x * 4
x = 1,25,000
Hence, Required Change in Unit Sales = 25,000 increase
2. New Gross Margin % = [(Total Sales Revenue - Cost of Goods Sold)/Total Sales Revenue] * 100
= [(4x-3x)/4x ] * 100 ( x is the new number of units produced )
= ( x/4x ) * 100
= 25 %
3. It is mentioned that the market grows at the rate of 20% per year.
Our Market Share Initially = 70%
Let's assume that the total market size = x
(70/100) x = 1,00,000
x = 1000000/7
Market Size at the end of the year = 1.2 * x ( Growth of 20% )
= 1.2 * 1000000 / 7
= 1,71,428 units
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