Danielson Electronics manufactures color television sets for sale in a highly competitive marketplace. Recently Ron Thomas, the marketing manager of Danielson Electronics, has been complaining that the company is losing market share because of a poor quality image, and he has asked that the company’s major product, the 25-inch console model, be redesigned to incorporate a higher quality level. The company general manager, Steve Hatting, is considering the request to improve the product quality but is not convinced that consumers will be willing to pay the additional expense for improved quality.
As the company controller, you are in charge of determining the cost-effectiveness of improving the quality of the television sets. With the help of the marketing staff, you have obtained a summary of the average retail price of the company’s television set and the prices of 29 competitive sets. In addition, you have obtained from The Shoppers’ Guide, a magazine that evaluates and reports on various consumer products, a quality rating of the television sets produced by Danielson Electronics and its competitors. The file P11_68.xlsx summarizes these data. According to The Shoppers’ Guide, the quality rating, which varies from 0 to 10 (10 being the highest level of quality), considers such factors as the quality of the picture, the frequency of repair, and the cost of repairs.
Discussions with the product design group suggest that the cost of manufacturing this type of television set is 125 _ Q2, where Q is the quality rating.
a. Regress Average Price versus Quality Rating. Does the regression equation imply that customers are willing to pay a premium for quality? Explain.
b. Given the results from part a, is there a preferred level of quality for this product? Assume that the quality level will affect only the price charged and not the level of sales of the product.
c. How might you answer part b if the level of sales is also affected by the quality level (or alternatively, if the level of sales is affected by price)?