ADM 2320 Lecture 11: Chapter 11-marketing
The sales and profits of an individual product may not follow the life cycle pattern.
During the sales decline stage of the product life cycle, no firm can earn a profit.
During the introduction stage of the product life cycle:
|none of the above.|
|most products achieve intensive distribution.|
|promotion is likely to be needed to increase primary demand.|
|"me too" products quickly take market share away from the innovator.|
|industry profits are at their highest.|
During the introduction stage, what would hinder acceptance of a new product?
|consumers may not see the new product as offering a superior alternative to whatever they are currently using.|
|risk in buying something for the first time.|
|all of the above.|
|the new product may not be compatible with the buyer's values.|
|problems communicating or demonstrating the new product's benefits.|
During the market growth stage of the product life cycle:
|industry sales grow slowly.|
|industry profits fall, then rise.|
|the market begins to fragment into sub-markets or segments.|
|all of the above.|
|the industry experiences the smallest profits|
|pool of potential users is exhausted.|
|aggressive competitors entering the markets.|
|less efficient firms leaving the market.|
Gerhard Company has seen most of its competitors drop out of its product market due to declining sales and profits. However Gerhard still has much demand for its products from a small group of loyal customers. In which stage of the product life cycle is this product market?
The length of a product's life cycle:
|depends on the ease of entry to the market for competitors.|
|may be as short as 90 days.|
|may be as long as 100 years.|
|varies widely across products.|
|all of the above.|
Regarding product life cycles, a good marketing manager knows that:
|all of the above.|
|once a market goes into sales decline, oligopoly conditions set in.|
|a company's marketing mix usually should be kept constant over the product life cycle.|
|industry profits are increasing well after sales start to decline.|
|entirely different target markets may be involved at different stages of the product life cycle.|
Generating "socially responsible" new product ideas:
|reduces the long-term welfare of consumers.|
|is done by all companies.|
|is easy for new product planners.|
|is unprofitable and should not be done.|
|is promoted by consumer groups.|
Transfer Pricing with and without Capacity Constraints
Elise Carpets Inc. has just acquired a new backing division that produces a rubber backing, which it
sells for $3.30 per square yard. Sales are about 1,200,000 square yards per year. Since the Backing
Division has a capacity of 2,000,000 square yards per year, top management is thinking that it might
be wise for the companyâs Tufting Division to start purchasing from the newly acquired Backing Divi-
sion. The Tufting Division now purchases 600,000 square yards per year from an outside supplier at a
price of $3.00 per square yard. The current price is lower than the competitive $3.30 price as a result
of the large quantity discounts. The Backing Divisionâs cost per square yard follows.
Direct materials .........................................................$1.80
Fixed overhead (1,200,000 level) ............................................0.15
Total cost ..............................................................$2.77
a. If both divisions are to be treated as investment centers and their performance evaluated by the
ROI formula, what transfer price would you recommend? Why?
b. If fixed costs are assumed not to change, determine the effect on corporate profits of making the
c. Based on your transfer price, would you expect the ROI in the Backing Division to increase, de-
crease, or remain unchanged? Explain.
d. What would be the effect on the ROI of the Tufting Division using your transfer price? Explain.
e. Assume that the Backing Division is now selling 2,000,000 square yards per year to retail outlets.
What transfer price would you recommend? What will be the effect on corporate profits?
f. If the Backing Division is at capacity and decides to sell to the Tufting Division for $3.00 per
square yard, what will be the effect on the companyâs profits?
EZ Sharp Industries, Inc., manufactures the Kleen Edge(TM) line of diamond-abrasive cutlery sharpeners for home use. EZ Sharp holds a patent on its unique design and can earn substantial economic profit if it prices its Kleen Edge(TM) products wisely. EZ Sharp sells two models of its Kleen Edge(TM) sharpeners: The Classic, which is the entry-level model, and the Professional, which has a sonic sensor that controls the speed of the sharpening wheels.
Short run production of sharpeners is subject to constant costs: AVC = SMC for both models. The constant costs of production at EZ Sharp Industries are estimated to be:
$20.00 = AVCc = SMCc
$30.00 = AVCp = SMCp
AVCc and SMCc are constant cost for the classic model and
AVCp and SMCp are constant costs for the professional model
Total fixed costs each month are $10,000. The sole owner of EZ Sharp also manages the firm and makes all pricing decisions. The owner-manager believes in assuring himself a 200% profit margin by using the cost-plus pricing methodology to set prices for his two product lines. At these prices, EZ Sharp is selling 3,750 units of Classic model per month and 2,000 units of the Professional model per month.
a. Using the cost-plus technique, compute the prices the owner-manager charges for the Classic and the Professional models, based on his required 200% profit margin.
b. How much profit is EZ Sharp earning each month using the cost-plus prices in part a? The owner-manager is ready to sell the firm, but he knows the value of the firm will increase if he can increase the monthly profit somehow. He decides to hire Andrews Consulting to recommend ways for EZ Sharp to increase its profits. Andrew reports that production is efficient, but pricing can be improved. Andrews argues a new pricing plan based on optimal pricing techniques (i.e., the MR = MC rule).
To implement the MR = MC methodology, Andrews undertakes a statistical study to estimate the demands for two Kleen Edge (TM) products. The estimated demands are:
Qc = 6,000 â 75Pc + 25 Pp
Qp = 5,000 â 50Pp + 25Pc
Where QC and QP are the monthly quantities demanded of Classic and Professional models, respectively, and PC and PP are prices of Classic and Professional models, respectively. Andrews Consulting solved the demand equations simultaneously to get the following inverse demand functions, which is why Anderson gets paid the âbig bucksâ:
Pc = 136-0.016Qc -0.008Qp
Ps = 168 -0.008Qc -0.024Qp
c. Find the two marginal revenue functions for the Classic and Professional model sharpeners.
d. Set each marginal revenue function in part c equal to the appropriate cost and solve for the profit-maximizing quantities.
e. Using the results from part d, what prices will Andrews Consulting recommend for each model?
f. When the owner-manager sees the prices recommended by Andrews Consulting, he brags about how close his simple cost-plus pricing method had come to their suggested prices. Compute the profit EZ Sharp can earn using the consultantsâ prices in part d. Is there any reason for the owner-manager to brag about his cost-plus pricing skills?