Maxine Ltd. operates in the handbag market and has two products in their portfolio: Belinga and Turroc.
Question:
Maxine Ltd. operates in the handbag market and has two products in their portfolio: Belinga and Turroc. Belinga is a well-established product currently in the growth stage of its lifecycle, and will be entering its maturity stage in a couple of weeks. Turroc, on the other hand, has just completed its market testing and is about to be introduced to the market.
Both products are produced from similar components and share a similar production process. The following data is relevant for both products (on per unit basis).
Belinga | Turroc | |
Material Usage: | ||
Component X (in metres) | 2.5 | 4 |
Component Y (in kg) | 3 | 7 |
Labour usage: | ||
Skilled labour | 140 mins | 300 mins |
Unskilled labour | 60 mins | 40 mins |
Fixed overheads | £240/unit | £450/unit |
Note: budgeted levels of production are 6,000, and 7,000 units of Belinga and Turroc respectively per week.
Component X costs £10 per metre, while component Y costs £15 per metre. Skilled labour costs £30 per hour, whereas unskilled labour costs £15 per hour.
Market research indicates that both products face different demand conditions, although there is a linear relationship between price and the number of units demanded, in the form of P= a – bx.
For Belinga, at the selling price of £250 per unit, demand is expected to be 10,000 per week. For every £20 increase in price, quantity demanded will decrease by 400 units, and for every £20 decrease in price, quantity demanded will increase by 400 units.
For Turroc, at the selling price of £500 per unit, demand is expected to be 12,000 per week. For every £50 increase in price, quantity demanded will decrease by 400 units, and for every £50 decrease in price, quantity demanded will increase by 400 units.
In the first 10 weeks, the availability of component X is limited to only 25,000 metres. Maxine has sourced additional supply lines for component X, but they can only supply unlimited quantities of component X after the first 10 weeks.
(a) Estimate the variable cost per unit for both products.
(b) Calculate the profit maximising price for both products for the first 10 weeks, taking into consideration the resource constraints. Assume that Maxine prefers to concentrate on Belinga within this period. Note: if P=a – bx, then MR = a – 2bx
(c) Estimate the profit maximising price for Turroc after the first 10 weeks, and calculate the total profit that will be earned per week there on
(d) Discuss penetration pricing policy and the conditions under which it is likely to be successful or otherwise.