Al Ennabi, Inc. is a newly established company in Doha since 2019. It produces premium ice...

      

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Al Ennabi, Inc. is a newly established company in Doha since 2019. It produces premium ice cream in a variety of flavours. Over the past months, and due to the company's endeavours to initially lower its prices to attract more customers, yet without compromising the quality of its products, the company has experienced rapid and continuous growth as reflected from the sustained demand of its products, which may allow management to reasonably consider the change of its selling prices, without ignoring the impact of competition of course. In addition, and in an effort to increase sales during the World Cup event in Qatar, Al Ennabi is planning to increase manufacturing capacity by opening production facilities in new geographic areas including the Pearl, Lusail, Al Wakra, Al Khor, across the majority of the shopping malls, in addition to the 6 main stadiums that are hosting the matches. These initiatives have put pressure on management to better understand both their potential markets and associated costs. Management identified three aspects of their current operation that could affect the new market expansion decision: (1) a highly competitive ice cream market, (2) the company's current marketing strategy, and (3) the company's current cost structure. Since the company began operations in 2019, it has used the cost-plus approach for establishing prices for one box of ice cream. The product prices include the cost of materials and labour, a markup for profit and overhead cost together, and a market adjustment. As per Al Ennabi's policy, an amount of QR 74 is set for each product to represent the mark up that shall cover both, the profit and overhead cost. The market adjustment is used to appropriately position a variety of products in the market. The goal is to price the products in the middle of comparable ice creams offered by competitors while maintaining high quality and high differentiation. Sales volume and prices as well as direct costs for the current year are presented below by product covering the period from January 1, 2022 up-to-date. Prodoc Material & Labour Marku Market Adjustment Price Boxes Sold Vanilla OR 106 OR 74 QR IRS 10 200 QR 200 OR 176 OR 179 Choco Lemon OR 101 OR 95 OR 98 OR 74 OR 14 QR 74 QR 5 QR 25 QR 7 QR 7 12 500 12 900 13600 The company's manufacturing overhead costs were QR 2 371 120 (75% variable & 25% fixed). Al Ennabi is considering replacing cost-plus pricing with target costing and has prepared the table below to better compare the methods. Al Ennabi tries to appeal to the top 30% of the retail sales customers, including restaurants and cafes. In positioning Al Ennabi's products, three dimensions are considered: price, quality, and product differentiation. Accordingly, there are three main competitors in the market as follows: Competitor A Low cost, low quality, high standardization > Competitor B- Average cost, moderate quality, average differentiation Competitor C High cost, high quality, high differentiation Product Competitor A Competitor B Competitor C Pricing Pricing Pricing OR 179 OR 200 OR 200 QR 183 QR 194 OR 205 Not offered OR 186 OR 186 OR 190 Al Ennabi Target Prices OR 194 OR 198 Vanilla Choco Caramel Lemon Al Ennabi has also been reviewing its purchasing, manufacturing, and distribution processes. Assuming that sales volume will not be affected by the new target prices, and before considering the increase of the manufacturing capacity by opening new branches, the company believes that the improvements in these processes will result into the following: > QR 5 decrease in the materials & labour unit cost for both the vanilla and choco flavours. > QR 5 increase in the materials & labour unit cost for both the caramel and lemon flavours. QR 292 670 reduction in the variable manufacturing overhead cost. Not offered Not offered OR 180 QR 188 Required: 1. In regards to the supply and demand of Al Ennabi's products, discuss the three major factors affecting the pricing decisions, and how would Al Ennabi set its short and long-run pricing decisions. You are also required to outline and differentiate between the two alternative approaches for setting Al Ennabi's prices. In your answer, show the formula that represents each method. Furthermore, and given Al Ennabi's business environment, which approach is relevant for setting its prices compared to other levels of competition in other market sectors. Al Ennabi, Inc. is a newly established company in Doha since 2019. It produces premium ice cream in a variety of flavours. Over the past months, and due to the company's endeavours to initially lower its prices to attract more customers, yet without compromising the quality of its products, the company has experienced rapid and continuous growth as reflected from the sustained demand of its products, which may allow management to reasonably consider the change of its selling prices, without ignoring the impact of competition of course. In addition, and in an effort to increase sales during the World Cup event in Qatar, Al Ennabi is planning to increase manufacturing capacity by opening production facilities in new geographic areas including the Pearl, Lusail, Al Wakra, Al Khor, across the majority of the shopping malls, in addition to the 6 main stadiums that are hosting the matches. These initiatives have put pressure on management to better understand both their potential markets and associated costs. Management identified three aspects of their current operation that could affect the new market expansion decision: (1) a highly competitive ice cream market, (2) the company's current marketing strategy, and (3) the company's current cost structure. Since the company began operations in 2019, it has used the cost-plus approach for establishing prices for one box of ice cream. The product prices include the cost of materials and labour, a markup for profit and overhead cost together, and a market adjustment. As per Al Ennabi's policy, an amount of QR 74 is set for each product to represent the mark up that shall cover both, the profit and overhead cost. The market adjustment is used to appropriately position a variety of products in the market. The goal is to price the products in the middle of comparable ice creams offered by competitors while maintaining high quality and high differentiation. Sales volume and prices as well as direct costs for the current year are presented below by product covering the period from January 1, 2022 up-to-date. Prodoc Material & Labour Marku Market Adjustment Price Boxes Sold Vanilla OR 106 OR 74 QR IRS 10 200 QR 200 OR 176 OR 179 Choco Lemon OR 101 OR 95 OR 98 OR 74 OR 14 QR 74 QR 5 QR 25 QR 7 QR 7 12 500 12 900 13600 The company's manufacturing overhead costs were QR 2 371 120 (75% variable & 25% fixed). Al Ennabi is considering replacing cost-plus pricing with target costing and has prepared the table below to better compare the methods. Al Ennabi tries to appeal to the top 30% of the retail sales customers, including restaurants and cafes. In positioning Al Ennabi's products, three dimensions are considered: price, quality, and product differentiation. Accordingly, there are three main competitors in the market as follows: Competitor A Low cost, low quality, high standardization > Competitor B- Average cost, moderate quality, average differentiation Competitor C High cost, high quality, high differentiation Product Competitor A Competitor B Competitor C Pricing Pricing Pricing OR 179 OR 200 OR 200 QR 183 QR 194 OR 205 Not offered OR 186 OR 186 OR 190 Al Ennabi Target Prices OR 194 OR 198 Vanilla Choco Caramel Lemon Al Ennabi has also been reviewing its purchasing, manufacturing, and distribution processes. Assuming that sales volume will not be affected by the new target prices, and before considering the increase of the manufacturing capacity by opening new branches, the company believes that the improvements in these processes will result into the following: > QR 5 decrease in the materials & labour unit cost for both the vanilla and choco flavours. > QR 5 increase in the materials & labour unit cost for both the caramel and lemon flavours. QR 292 670 reduction in the variable manufacturing overhead cost. Not offered Not offered OR 180 QR 188 Required: 1. In regards to the supply and demand of Al Ennabi's products, discuss the three major factors affecting the pricing decisions, and how would Al Ennabi set its short and long-run pricing decisions. You are also required to outline and differentiate between the two alternative approaches for setting Al Ennabi's prices. In your answer, show the formula that represents each method. Furthermore, and given Al Ennabi's business environment, which approach is relevant for setting its prices compared to other levels of competition in other market sectors.

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The three major factors that affect Al Ennabis pricing decisions are the companys cost structure the competitive environment and the companys marketin... View the full answer