Gul Ahmed Holdings (Private) Limited (GAHPL)

In the beginning of 2018, the marketing director and the finance director of Gul Ahmed Holdings met to prepare a joint pricing recommendation for Item 007. Once the approval for their recommendation is granted by the managing director, the company will announce the new recommended price to its consumers. As per the current industry and regulatory practice, the announced price will remain the same for the whole year unless something very radical happens in the market or industry.

The company head office is in Karachi, Pakistan. It is the largest company in its segment of the textile industry. Its 2017 turnover figures have reached to 40,000 million rupees. The sales force of the company is on a straight salary basis and every salesperson sold their quota of the lines every season. Most of Gul Ahmed competitors are small and usually they wait for Gul Ahmed to announce prices before their price decisions.

Item 007 is of superior quality and competitive product. Gul Ahmed have a separate department for it and its facilities could not be utilized on other product lines. In January 2016 Gul Ahmed have raised the Item 007s price from Rs.15 to Rs.20 per meter. This decision was taken with a view to bring the profit on this item to a level of other product lines in the company. Even though this company is financially very sound, it still requires considerable capital in the next few years to finance its long-term modernization and expansion program. Therefore, a price change on the Item 007 was one of the many changes announced to get the required funds for the expansion program.

The competitors of Gul Ahmed decided to keep their prices for this item at the level of Rs.15 during 2016 and 2017. The volume figures for Item 007 during 2012 2017 period for both 2

the industry and Gul Ahmed are presented in Table 1. This table is clearly showing that Gul Ahmed lost a considerable market share in recent times. During the discussion, the sales director mentioned that a reasonable estimate of industry volume for Item 007 in 2018 would be around 700,000 meters. He is also confident that the company can sell 25% of the 2018 industry total if it brings the price down to Rs.15 per meter. He is also worried that the market share will shrink further if we did not bring the price down. However, he is also convinced about the superiority of Gul Ahmeds product and as a result, he thinks the volume will not come down below 75,000 meters even at Rs.20 a meter.

The finance and the marketing directors also discussed two other aspects of the problem. The finance director was concerned about the reaction of the competitors that if we bring the price down to Rs.15 a meter, they will reduce it even further below. However, the marketing director was confident that it will not be the case because not only their production cost is higher but also most of them have financial problems. He is also confident that if we act on the price of Item 007, it will also have no substantial repercussions on other product lines.

The finance director presented estimated costs of Item 007 at various levels of production in Table 2. These figures reflect projected labour and material costs, which are based on past experience except for 75,000 and 100,000 meters. The company mostly produced more than 100,000 meters in the past, and earlier experience is not applicable because of equipment changes and increase in labour productivity.

Question:

1. Should Gul Ahmed reduce the price to Rs.15 a meter or keep it at Rs. 20 a meter (assume no middle ground is available for price set up)?

2. How do you decide if Guld Ahmed is earning a profit on Item 007 at Rs.15 a meter?

3. If you are the manager of the department that produces Item 007, would it be to your financial advantage to lower the price or keep it at the same level for 2018?

(Provide support for your answer with figures, calculations, and logical reasoning).

Table 1 Item 007, Prices and Production, 2012 2017 Volume of Production (meters)	Price (Pakistani Rupee)
Year	Industry total	Gul Ahmed	Competitor price	Gul Ahmed price
2012	610,000	213,000	20.00	20.00
2013	575,000	200,000	20.00	20.00
2014	430,000	150,000	15.00	15.00
2015	475,000	165,000	15.00	15.00
2016	500,000	150,000	15.00	20.00
2017	625,000	125,000	15.00	20.00

Table 2: Estimated cost per meter of item 007 at various volumes of production Production volumes	75,000	100,000	125,000	150,000	175,000	200,000
Direct labour^i	4.00	3.90	3.80	3.70	3.80	4.00
Material	2.00	2.00	2.00	2.00	2.00	2.00
Material spoilage	0.20	0.20	0.19	0.19	0.19	0.20
Department expense:
Direct^ii	0.60	0.56	0.50	0.50	0.50	0.50
Indirect^iii	4.00	3.00	2.40	2.00	1.71	1.50
General overhead^iv	1.20	1.17	1.14	1.11	1.14	1.20
Factory cost	12.00	10.83	10.03	9.50	9.34	9.40
Selling & Admin exp.^v	7.80	7.04	6.52	6.18	6.07	6.11
Total cost	19.80	17.87	16.55	15.66	15.41	15.51

i Any workers made redundant because of a decrease in the volume of sales of Item 007 can be economically absorbed into other departments of the company.

ii Indirect labour, supplies, repairs, powers, etc.

iii Depreciation, supervision etc.

iv 30% of direct labour, consisting principally of general plant administrative costs (plant supervision, plant services etc.) and occupancy costs.

v 65% of factory cost.