Pringly Division
A meeting of senior managers at Pringly Division has been called to expalin the pricing strategy for a new product. Part of the discussion would focus on estimating sales for the new product. Over the past years, a number of new products have failed to meet their sales targets. It appears that company’s profit for the year would be lower than budget and the major reason for this is the disappointing sale of new products.
This time a range of possible sales targets - rather than only one goal - would be established and evaluated.
The first strategy is to set the selling price of $170 with annual fixed costs at $20,000,000. A number of managers are in favor of this strategy, as they believe it is significant to reduce costs.
Second strategy is to increase spending on advertising and promotions and set the selling price of $200. With higher selling price the annual fixed costs will increase to $25,000,000. The marketing department is adamant which increased emphasis on advertising and promotions is essential.
The table below demonstrates three probable levels of customer demands. The likelihood of reaching a certain level is indicated by estimated probability. Note that it is not essential to create the complex model based on probabilities. Though, the probability distribution provides some guidance for the managers. Don't forget that company has certain minimum expectations of the new product.
Estimated demand (units) Estimated probability (units)
150,000 0.25
180,000 0.5
200,000 0.25
Additional information:
• The estimate of variable cost per unit is $30.
• The probability of new product achieving break-even is very significant. A profit greater than $4,000,000 is expected.
Required:
• Calculate break-even at each level.
• Is the company likely to achieve its desired target profit of $4,000,000 or more? Support your discussion with financial analysis.
• Calculate the margin of safety and explain the meaning of the number derived.
• Should the company go ahead with the new product?
• Will this type of analysis be useful to a large company with the wide range of products?
• ROI (return on investment) and residual income are two other methods that could be helpful for this type of decisions. Can they be applied in this situation? Support your answer with financial analysis.
Modular Case Assignment Expectations
It is significant to answer questions as posed. The discussion must be from 3 to 5 pages and written in a clear and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel or other compatible spreadsheet when computations are involved.