The commercial team has recommended the optimal pricing strategy for Bounty Basic to be 66% of the
Question:
The commercial team has recommended the optimal pricing strategy for Bounty Basic to be 66% of the cost to retailer of existing Bounty High-tier.[1] The product cost (COGS) is 50% of revenue received by P&G. (table below)
The marketing expenses to deliver these sales are €150,000, incurred annually. There is an additional €80,000 in Sales and Administration Expenses (combined), incurred annually. The firm pays corporate tax in Germany at a rate of 15%, one year in arrears, and given that there is a double taxation agreement between Germany and the USA, profits will not be taxed in the USA.[2]
To launch this product P&G will purchase machinery costing €2,500,000 that can be depreciated straight-line to zero over 5 years, and will also require an upfront investment in net working capital of €100,000. All costs quoted are ex- VAT and costed at 2022 prices.
The team in Germany has advised that the local VAT rate is 19%[3] and inflation is hitting an all-time high of about 7.9% as of August 2022[4]. Inflation is expected to stabilize at 5% for 2023 and beyond.
Bounty High-Tier Pricing in other European markets:
Bounty Pricing in other EU Markets | Cost to the Retailer (ex VAT) | Retailer Mark-Up on Cost | VAT | Shelf Price (incl VAT)* |
Austria | 4.25 | 20% | 10.00% | 5.61 |
Sweden | 4.68 | 19% | 12.00% | 6.24 |
France | 4.91 | 20% | 5.50% | 6.22 |
Switzerland | 4.50 | 20% | 17.50% | 6.35 |
Germany | 5.21 | 20% | 19.00% | 6.20 |
P&G is concerned that the COGS is underestimated and would like you to perform a sensitivity analysis should the actual COGS be 60% of revenue received by P&G. find the impact on the NPV of the project.
[1] Remember that P&G sells to the retailer and not the final consumer
[2] This is for learning purposes and may not reflect the reality of true commercial landscape
[3] https://taxsummaries.pwc.com/germany/corporate/other-taxes#:~:text=Value%2Dadded%20tax%20(VAT),from%20that%20payable%20on%20outputs.
[4] https://www.destatis.de/EN/Themes/Economy/Prices/Consumer-Price-Index/_node.html
Expert Answer:
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