Altius's Victor VH golf balls currently retail at $40 per dozen. Golf ball sales have been steady at 20 million dozens per year but Altius's market share has decreased over the last few years from 50% to 40%.
As the manager for the golf ball product line, you are considering one of two strategies to recapture share:
(1) decrease the retail price for VH by 5% to $38 for a dozen, or
(2) introduce a new, lower-priced VL ball that will compete at the $25 retail price point. Retailers expect a 20% margin on all golf balls.
a. Complete the table below to determine: (1) the unit profit implications of a $2 decrease in the retail price for VH, assuming the gross margin is currently 70%, and (2) the unit contribution for Victor VL, assuming a gross margin of 60%?
| Options |
Victor VH (Current) |
Victor VH $2 Price Decrease |
Victor VL |
|
Retailer Price
|
$40 |
$38 |
$25 |
| Retailer Margin |
20% |
20% |
20% |
| Victor Price |
|
|
|
| Victor Variable Cost |
|
|
|
| Victor Unit Contribution |
|
|
|
| Victor Gross Margin |
70% |
|
60% |
b. Complete the table below to determine current gross profit and the break-even market share and unit volume for the $2 retail price decrease option.
You believe that Altius could recapture 5 market share points (to 45%) by introducing the VL ball, but it would result in an additional 5 point drop in share for VH; in other words, VH would capture 35% share and VL would capture 10% share. Complete the table below to determine the gross profit implications.
Unit Volume
|
Total Market 100%
|
Victor VH 35%
|
Victor VH 35%
|
|
|
20,000,000
|
|
|
|
|
Unit Contribution
|
|
|
Combined Gross Profit
|
|
Unit Contribution
|
|
|
|
d. You also believe the $2 price decrease on VH balls would recapture 5 market share points (to 45%) without introducing the VL ball. Complete the table below to determine the gross profit implications.
|
Total Market
|
Victor VH
|
|
Market Share
|
100%
|
45%
|
|
Unit Volume
|
20,000,000
|
|
|
Victor unit contribution
|
|
|
|
Gross Profit
|
|
e. Which option would you choose and why?