Assignment task: Product and Pricing Decisions
Instructions: You must answer the following questions regarding the 'Singapore Metals Limited." (SML) case.
Questions are assigned different point values based on the breadth of information required for a good answer.
1. Product Line Pricing
Five years have passed since SML successfully launched the coded metal cushioning pad. You were hired to replace Alex Tan and have subsequently become President of the division. The Standard-Dover line of pads is the original product SML launched. The 30 cm Standard-Dover pad currently sells for $300 and provides a contribution margin of $150. Pad prices within the product line vary according to pad size, but contribution margins remain the same due to differences in manufacturing costs.
a. Economic forecasts for the construction industry suggest demand for piles should increase by 5% during the next three months. Therefore, you are considering price increases for all pile sizes of 2.5%, 5% and 10%. Assuming variable costs remain unchanged. how much could demand decrease and still warrant the price increase at each of the suggested increases? What role do fixed costs play in your decision? Why? Do you recommend a price increase? If so, how much?
b. Three years alter SML launched its first cushioning pad, the company developed and launched a uniquely formulated lubricant that is applied to the cushioning pad before inserting it into the driver. The lubricant reduces heat in the pile driver and increases pad life by 25%. SML currently sells the lubricant as add-on sale with 50% of all cushioning pads it sells. There is no current use for the lubricant beyond its application with SML cushioning pacts. One container provides enough lubricant to apply to five 30 cm pads. Each container of lubricant sells for $50 and the variable costs per container are $515. How does the existence of this hey I product in SML's product line change your analyses of the price increases in part {a} of this question? For purposes of this question, ignore potential cannibalization of pad sales caused by the extended driving time the lubricant provides.