The president of houston electronics was satisfied with the company's new product the HE Versatile CVD. The product is portable and will be attached to a computer tp play or record computer programs or sound, attached to an amplifier to record or play music, or attached to a TV to play or record TV programs. IT will even be attached to a camcorder to record videos directly on compact disks rather than on tape. It also will be used with a headset to play or record sound. The proud president announced that this single an innovative product would be an important factor in reestablishing the North American consumer electronic industry.
Based on development prediction and costs os sales volume, manufacturing cost, and distribution cost, the cost-based price of the HE Versatile CVD was evaluated to be $425. Subsequent a market skimming strategy, management set the initial selling price at $525. The marketing plan was to reduce the selling price by $50 through each of the first two years of the product's life to get the highest contribution possible from each market segment.
The initial sales of HE Versatile CVD were strong, and Houston Electronic found itself adding second and third production shifts. Although these shifts were expensive, at a selling price of $525, the product had plenty contribution margin to remain highly profitable. The president was talking with the company's main investor about the desirability of obtaining financing for a main plant expansion when the bad news arrived. A foreign company had announced that it would shortly introduce a same product that would incorporate new design features and sell for only $350. The president was shocked.
Required
Evaluate how could the foreign competitors profitably sell a similar product for less than manufacturing costs to Houston Electronic and what advice do you have for the president concerning the HE Versatile CVD? What advice would you have to assist the company avoid similar problems in future?