Pricing, Advertising, and Prepaid Contracts

You work on the new product development team for your company's new tablet computer offering, a smaller version of your wildly popular eTablet line. You have been given the task of determining three important decisions for this new product. First, you have been asked to determine the price for this product. Pricing is a tricky decision. You don't want to price the new tablet too high because few customers will choose the new product over your full-sized tablet offerings and you risk losing sales to your aggressively priced competitors' products. You don't want to price the product too low, because you want to earn as much revenue as possible from the product. Second, you must determine where to set the marketing budget for the new product. You know that there will be a base demand for your product that comes from your loyal customers who will buy just about anything you produce. Beyond that you also know that every dollar you spend on advertising will increase the demand for your product. Of course, there is a limit to how much money you will want to spend on advertising because eventually more money spent on advertising will have little effect on demand and will reduce the profitability of the new product. Finally, you have been asked to help decide how much money to prepay to the suppliers of the raw materials of the new product to reduce the overall costs of these materials. Every dollar you spend on prepaying your suppliers will reduce the costs of these materials and will ensure that your competitors don't have access to these materials. You have completed a spreadsheet model to aid in your analysis. Use the 'What If Analysis' options in Excel to help you determine the right price, advertising spending, and prepaid supplier contract for your new product.

8.1 Create a one-way data table for profit at different levels of supplier contact in range B22:C33 a. Ensure that the price in cell C3) is $290 and the advertising budget in cell C5 is $35,000,000 (you may need to manually adjust these values). b. Use the values in range B23:B33) as the different levels of the suppler contract. c. Reference the profit calculation in cell F12). d. Notice the "Supplier Contract and Profitability" chart updates with the values in the data table to visually demonstrate the relationship between supplier contract amounts and profitability. A B D E F 1 2. 3 Decisions to be Made Price $200 Supplier Contract $75,000,000 Advertising Budget $35,000,000 Market Information Competitor Pricing $200 Base Demand 1,000,000 Market Size 5,000,000 4 5 6 7 8 Variable Cost Calculations Variable Production Costs Prepaid Discount Amount Adjusted Variable Costs Profitability Total Revenue $840,000,000 (-) Total Variable Costs $725,542,281 (-) Total Fixed Costs $110,000,000 $199 $26 $173 9 10 11 12 Total Profit $4,457,719 13 14 Demand Calculations Price Demand Factor Total Demand 0% 4200000 15 16 17 Inputs Price (C3) Supplier Contract (C4) Advertising (C5) Decision Set 1 Decision Set 2 $200 $250 $50,000,000 $75,000,000 $25,000,000 $25,000,000 Decision Set 3 $329 $100,000,000 $50,000,000 Decision Set 4 $250 $20,000,000 $50,000,000 18 19 20 Supplier Contract and Profitability $1 $1 $1 21 22 23 24 25 26 27 28 29 30 Profit $1 Supplier Contract and Profitability Supplier Contract $0 $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 $90,000,000 $100,000,000 $0 $0 SO $0 31 $10,000,000 000 000 $ 000'000'OES O'Do's $50.000.000 $60,000,000 000'000'S $80,000,000 $90,000,000 $100.000.000 32 33 Supplier Contract Level Advertising Budget $50,000,000 $75,000,000 Price, Advertising, and Profitability $25,000,000 $1 34 35 36 37 38 39 40 41 $1 $1 Total Profit $1 42 -$25,000,000 $0 $0 $0 $200 $220 $240 $250 $280 $300 $320 $340 $360 $380 $400 Price Price $200 $210 $220 $230 $240 $250 $260 $270 $280 $290 $300 $310 $320 $330 $340 $350 $360 $370 $380 $390 $400 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 8.1 Create a one-way data table for profit at different levels of supplier contact in range B22:C33 a. Ensure that the price in cell C3) is $290 and the advertising budget in cell C5 is $35,000,000 (you may need to manually adjust these values). b. Use the values in range B23:B33) as the different levels of the suppler contract. c. Reference the profit calculation in cell F12). d. Notice the "Supplier Contract and Profitability" chart updates with the values in the data table to visually demonstrate the relationship between supplier contract amounts and profitability. A B D E F 1 2. 3 Decisions to be Made Price $200 Supplier Contract $75,000,000 Advertising Budget $35,000,000 Market Information Competitor Pricing $200 Base Demand 1,000,000 Market Size 5,000,000 4 5 6 7 8 Variable Cost Calculations Variable Production Costs Prepaid Discount Amount Adjusted Variable Costs Profitability Total Revenue $840,000,000 (-) Total Variable Costs $725,542,281 (-) Total Fixed Costs $110,000,000 $199 $26 $173 9 10 11 12 Total Profit $4,457,719 13 14 Demand Calculations Price Demand Factor Total Demand 0% 4200000 15 16 17 Inputs Price (C3) Supplier Contract (C4) Advertising (C5) Decision Set 1 Decision Set 2 $200 $250 $50,000,000 $75,000,000 $25,000,000 $25,000,000 Decision Set 3 $329 $100,000,000 $50,000,000 Decision Set 4 $250 $20,000,000 $50,000,000 18 19 20 Supplier Contract and Profitability $1 $1 $1 21 22 23 24 25 26 27 28 29 30 Profit $1 Supplier Contract and Profitability Supplier Contract $0 $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 $90,000,000 $100,000,000 $0 $0 SO $0 31 $10,000,000 000 000 $ 000'000'OES O'Do's $50.000.000 $60,000,000 000'000'S $80,000,000 $90,000,000 $100.000.000 32 33 Supplier Contract Level Advertising Budget $50,000,000 $75,000,000 Price, Advertising, and Profitability $25,000,000 $1 34 35 36 37 38 39 40 41 $1 $1 Total Profit $1 42 -$25,000,000 $0 $0 $0 $200 $220 $240 $250 $280 $300 $320 $340 $360 $380 $400 Price Price $200 $210 $220 $230 $240 $250 $260 $270 $280 $290 $300 $310 $320 $330 $340 $350 $360 $370 $380 $390 $400 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57