Case 1: Pricing (SMAC)

Canadian Product Corporation Limited (CPCL) is a manufacturer of small household appliances. The company has only one manufacturing facility which services all of Canada. CPCL is well established and sells its products directly to department stores. CPCL wishes to begin manufacturing and marketing its newly developed cordless steam iron. In order to properly evaluate the performance of this new product, management has decided to create a new division for its production and distribution. Two of CPCLs competitors have recently introduced their own brands of cordless steam irons at a price of $28 each. CPCLs usual pricing strategy for new products is full absorption cost plus a 100% markup. For the new iron, at a production and sales volume of 350,000 units per year, this strategy would imply a price of $31.50. CPCLs president, Mr. T. C. Leopard, is not sure whether this pricing strategy would be appropriate for the new iron and is considering other proposals as follows: 1. Variable product cost plus a 200% markup 2. A price of $27 to undercut the competition Mr. Leopard hired a market research firm to study the likely demand for CPCLs cordless steam iron at the three proposed prices. The research firm conducted an extensive market test resulting in projected annual sales volumes over the next five years at these prices. These sales projections are summarized in Exhibit A1-1. The research firm, however, made it clear that there were no guarantees that the market would respond according to the projections. Mr. Leopard was not happy with the probabilities that the market research firm assigned to the various price/volume levels. He therefore used his own knowledge and past experience to assign different probabilities (see Exhibit A1-2). Mr. Leopard then called Joan Helm, the chief financial officer, to analyze the situation and recommend a five-year pricing strategy for the new cordless steam iron. As a first step, Joan assembled some relevant data which is presented in Exhibit A1-3.

REQUIRED As Joan Helm, comply with Mr. Leopards request. Include in your analysis consideration of both quantitative and qualitative factors in determining a five-year pricing strategy for the new iron.

EXHIBIT A1-1 CPCL Market Research Data for Cordless Steam Iron EXHIBIT A1-2 CPCL President's Probability Data for Cordless Steam Iron Selling Price Selling Volume Probability Volume Probability Price 10% 50 40 20 40 40 40 50 10 $24.00 500,000 400,000 300,000 400,000 350,000 250,000 300,000 250,000 200,000 $24.00 500,000 400,000 300,000 400,000 350,000 250,000 300,000 250,000 200,000 20% 50 30 25 45 30 30 50 20 27.00 27.00 31.50 31.50 EXHIBIT A1-1 CPCL Market Research Data for Cordless Steam Iron EXHIBIT A1-2 CPCL President's Probability Data for Cordless Steam Iron Selling Price Selling Volume Probability Volume Probability Price 10% 50 40 20 40 40 40 50 10 $24.00 500,000 400,000 300,000 400,000 350,000 250,000 300,000 250,000 200,000 $24.00 500,000 400,000 300,000 400,000 350,000 250,000 300,000 250,000 200,000 20% 50 30 25 45 30 30 50 20 27.00 27.00 31.50 31.50