Case #2 - Pricing

(25 points)

Your team has been called in to offer consulting advice to John Q. Wizzle's Wonderful World of Weasel Widgets. Since you have never heard of weasel widgets or this company, the owner John Q. Wizzle has decided to give you background on the industry and on his company. He informs you that the weasel widget industry has been relatively stable. Regardless of the pricing and advertising of the smaller competitors, David's Widgets (the market leader) consistently gets 60% of the industry's annual market sales of 150,000 units. Meanwhile, the market shares of the remaining competitors have fluctuated substantially as they experiment with new prices, yet the total market size has remained stable. John Q. Wizzle's Wonderful World of Weasel Widgets has charged $5 per unit for several years and sells an average of 2,500 units per month. He has not attempted to steal share from the other small competitors

John Q. Wizzle tells you about his current cost structure. He pays a manager $2,000 per month. He pays an accountant $3,000 once per year. He pays $7,000 per year in electricity. He hires workers and pays them $15 for every 6 weasel widgets they are able to make. There are two alloys that are used in equal parts in the production of the widgets. One of the alloys costs $10/pound. The other alloy costs $15/pound. Combined, a pound of each alloy produces 25 widgets.

John Q. Wizzle has just learned that if he buys one of the alloys in bulk, he can get a discount. Specifically, the first 110 pounds per month of the first alloy is still $10/ pound, but every pound per month after that is half price. The other alloy is not discounted and remains $15 per pound at all purchase levels.

John Q. Wizzle is thinking about cutting the price so that he can sell more units and take advantage of the cost savings from buying in bulk. Specifically, he is thinking of changing his price per unit from $5 to $4. He has hired you to tell him if it is a good idea.

(This case can have 2 sets of correct answers. The case does not state John's warehouse space - he can either stock up on the parts for the whole year if the warehouse space allows, or he has to reorder parts every month. You can take on one of these two assumptions. Please state your assumption very clearly, and show your work)

Please make a recommendation as to whether he should make this change and quantitatively prove why your recommendation is correct.