Pricing Strategy: Case Study

Case Study: Pricing Strategy

Pringly Division

Answer No. 1: The break even units at each level are calculated as follows:

First Strategy:

Second Strategy:

Answer No. 2:

Yes, The Company is likely to achieve its desired profit of 4,000,000 or more if the company can achieve the sales level of 180,000 units. For both the strategies, the 180,000 units are enough to make more than 4,000,000 profits. This level of unit's sales is also supported by the given probability which is 50%. So, there are 50% chances that the company will be able to make more than 4,000,000 profits if the company goes for 180,000 levels of unit's sales. Following table can help understanding this point. FIRST STRATEGY SECOND STRATEGY

Units

180,000

Probability

Units

180,000

Revenue

30,600,000

 

Revenue

36,000,000

Variable Cost

6,300,000 50%

Variable Cost

6,300,000

Fixed Cost

20,000,000

 

Fixed Cost

25,000,000

Net Income

4,300,000

 

Net Income

4,700,000

Secondly, if we take a close look, we will conclude that in Second Strategy the company is spending additional 5,000,000 in fixed cost making 25,000,000 of total fixed cost, which is producing just 400,000 extra in Net Income making it a total of 4,700,000. However, the company can make a profit of 4,300,000 by investing 20,000,000 in fixed cost. So in my point of view, by spending additional 5,000,000 in second strategies, and getting just 400,000 additional profits, will not be a better option for the company. As company can save this amount and can invest in any other business line which can give higher rate of return.

Answer No. 3:

Considering that company wants to make a profit of more than 4,000,000, The Margin Of Safety of the remaining situations are computed and as follows:

First Strategy

Probability

Second Strategy

Units

180,000

Units

180,000

Revenue

30,600,000

Revenue

36,000,000

Variable Cost

6,300,000 50%

Variable Cost

6,300,000

Fixed Cost

20,000,000

Fixed Cost

25,000,000

Net Income

4,300,000

Net Income

...