In December 2017, the Director of Sales and the Director of Planning & Administration of Croft Industries met to be ready for a joint recommendation to the President on the pricing of the company's line of asphalt shingles. Croft Industries had been a price leader over the years and traditionally when they announced its price on shingles, the industry followed. However, Croft had announced a price increase in January 2016 and this time, the competitors did not follow suit. Croft has since experienced a measurable decline in market share. Approximately 80 percent of the homes in Croft's region have asphalt shingles. About 90 percent of the homeowners contracting for new roofs use asphalt shingles. Nevertheless, the market for shingles has leveled off in recent years because of depressed conditions in new home construction and a lower incidence of re-roofing owing to uncertain economic conditions. Sales and Marketing efforts for asphalt shingles focus on roofing material distributors. Distributors provide a warehousing function for shingle manufacturers and sell shingles to roofing contractors or applicators who install shingles. Croft Industries is a major regional manufacturer of asphalt shingles for single-family houses. Company sales in 2017 were $10 million. The company's line of asphalt shingles is highly regarded by roofing material applicators in its region, and virtually all major distributors carry the company's line. None of Croft's competitors have distribution through more than half of the distributors in the region. Croft had enjoyed a leadership position in its region because large national producers of shingles such as GAF and Georgia-Pacific did not have manufacturing facilities in the region. Costs of freight due to weight of asphalt shingles precluded the national firms from shipping shingles from their manufacturing sites. In January 2016, Croft raised its price per square1 of asphalt shingles from $18 to $20. Although the company was strong financially, the price increase was prompted in part by a decision to embark on an extensive plant modernization and expansion program. The price increase was one of several changes directed by the board to improve the company's working capital position.

Exhibit 1 Volume and Price Behavior for Asphalt Shingle Squares, 2009 - 2017 Volume of Squares (thousands) Price per Square Year Region Croft Industries Competitors Croft Industries 2009 830 500 $17 $17 2010 977 586 $17 $17 2011 1085 651 $15 $15 2012 1205 723 $15 $15 2013 1339 803 $17 $17 2014 1488 893 $18 $18 2015 1600 960 $18 $18 2016 1500 750 $18 $20 2017 1250 500 $18 $20 Contrary to past behavior, Croft's five competitors did not increase their prices. Rather, they held their prices at $18 per square. In 2017, Croft recorded the same sales volume level as had been achieved in 2009 (see Exhibit 1). Croft's President instructed the Director of Sales and the Director of Planning and Administration to be ready for recommendation on the company's price policy and competitive posture soon after the end-of-the-year totals were recorded. During the course of the initial meeting, the Director of Sales presented data on projected housing starts and the age of existing housing stock (to estimate re-roofing potential) in the region to arrive at a volume forecast for asphalt shingle squares. The figure both executives believed realistic was 1.2 million asphalt shingle squares for the region in 2018. A week later the executives met and discussed their options. After a lengthy discussion, they concluded that two options existed. They could recommend maintaining the price at $20 per square or reducing the price to $18. The option of increasing the price to $22 per square was dismissed on the grounds that the price differential between Croft and its competitors would be too great. In the Sales Director's opinion, it was unlikely that the competitors would reduce their prices in the near future regardless of whether Croft lowered its price or maintained the $20 price. He noted that the competitors were experiencing financial difficulties. However, he also believed that nothing was impossible and that there was a 10 percent chance of the competitors lowering their prices below $18. The Director of Planning and Administration felt that the probability was conceivably higher but was unable to assign a probability estimate. During the discussion on competitive response, the Director of Sales commented that if Croft kept its price at $20, an additional loss of 10 percentage points in market share would result regardless of the actions by competitors. He felt that lowering the price to $18 would lead to a gain of 10 percentage points in market share in 2018 if the competitors stayed at the $18 price. If the price were reduced to $18 and the competitors retaliated with an additional price cut, however, Croft could expect a loss of 15 percentage points in market share in 2017. These assessments were based on discussions with the company's sales force indicating that a number of large construction contracts were locked into a $20 price and that Croft's quality

image would preclude a major downward movement in market share. Also, several sales representatives indicated that many applicators who purchased shingles from competitors at $18 per square were marking up the product in such a manner that the installed price to homeowners and builders was equal to Croft's installed price at typical markup levels. The installed price parity was annoying to competitors because they had no cost advantage at the point-of-sale or in the bidding process for new construction. In addition, it was believed that the competitors had higher direct labor and material costs than Croft did. The effect of this cost disadvantage was that competitors' contribution margins were lower than those of Croft Industries. Later in the same week, the Accounting Department submitted a cost breakdown on the company's line of asphalt shingles. These data are shown in Exhibit 2. In addition, the Accounting Department, in consultation with market research personnel, prepared a summary of the operating performance of the five competitors, shown in Exhibit 3. Croft Industries planned to maintain selling and administrative expenses at 2017 levels. Exhibit 2 Estimated Per-Square Costs of Asphalt Shingles at 500,000-Square Volume Direct Labor $0.29 Direct Material $12.55 Overhead $0.93 Selling and general and administrative (SG&A) expenses2 $2.06 Total cost per square $15.83 Exhibit 3 Selected Operating Data on Croft's Competitors, 2017 Competitors A B C D E Unit (square) volume 200,000 190,000 150,000 150,000 60,000 Cost of goods sold/unit $14.00 $14.50 $15.50 $15.00 $15.25 SG&A expenses $500,000 $475,000 $425,000 $425,000 $350,000

After asking what's happening, Vice President Bill Lumbergh boldly said that he had been looking into moving manufacturing offshore to reduce costs and make more profit (see accompanying Excel file for Exhibit 4). He didn't care about the sales volume remaining at 500,000 annually as long as costs were reduced and the profit levels were higher and, of course, it was good for the company. Young hot-shot (insert your name here) disagreed with Lumbergh and said that the gains from that type of move would be short term only and that lax safety and quality levels would ultimately produce an estimated 15% product returns annually, starting in approximately 12 months. Further (again, insert your name here) stated that, since Lumbergh was 60, he was only looking at the company with a maximum 5 year vision. When (again, you name here) asked where Lumbergh where the new manufacturing plant would be, Lumbergh said "some third world country....who cares, as long as it's not in my back yard, asphalt is a carcinogen." A clearly upset Milton Waddams got up at this point and walked out of the room, mumbling something about a missing red Swingline stapler and burning the building down