Example 1:Multinational Production and Pricing

Almost all firms face the problem of pricing their products. Consider a U.S. multinational carmaker that produces and sells its output in two geographic regions. It can produce cars in its home plant or in its foreign subsidiary. It sells cars in the domestic market and in the foreign market. For the next year, it must determine the prices to set at home and abroad, estimate sales for each market, and establish production quantities in each facility to supply those sales. It recognizes that the markets for vehicles at home and abroad differ with respect to demand. Also, the production facilities have different costs and capacities. Finally, at a cost, it can ship vehicles from the home facility to help supply the foreign market, or vice versa. Based on the available information, how can the company determine a profit maximizing pricing and production plan for the coming year?

(a) Define the problem. (1 mark) (b) What is the objective of the project? (1 mark) (c) What are the alternatives to consider? (1mark) (d) How will you predict the consequences? (2 marks) (e) How will you make a choice from the alternatives? (2 marks) (f) How will you carry out a sensitivity analysis? (3marks)