Problem 13. 25 (Sales and Pricing Option with different mark-ups). PT Ltd supplies an imported consumable component to distributors who, in turn, sell it to industrial users. PT Ltd's selling prices range from Rs. 0.40 to around Rs. 5.00 per 100 according to size. There is a range of about 600 items, available in two materials. The cost of the components from PT Ltd's suppliers, and similarly the selling price to its customers, is lower as the quantity bought increases. Market research has shown that an important factor in the ability to sell this component is its availability for quick delivery (especially ex stock). This is particularly so for small orders (say, under 500) but much less so for large quantities where prices are keen and crucial to the purchase from any supplier. PT Ltd. has made a speciality of holding very large stocks and has always been in a strong position to give quick delivery. However, it charge about one-and-a-half times the prices of its competitors on the grounds that customers for small quantities(average price Re. 60 per 100) will be prepared to pay for quick delivery. In consequence, PT Ltd. is a peripheral supplier, used mainly for small quantities when quick delivery is crucial. It currently holds about 3% to 5% of the market. PT Ltd. buys from two major sources overseas. Supplier A is extremely cheap, and is PT Ltd's major supplier. However, A will sell to almost any customer, including PT Ltd's competitors, though such customers will need to place a large enough order to justify importing. Supplier B, though more expensive than A, holds very large stocks and can generally offer quicker delivery. Until two years ago it was PT Ltd's main supplier, but it has recently established a UK company. B (UK) Ltd, though which all sales to the UK will be placed. PT Ltd. is about to review its selling prices. It is concerned that B (UK) Ltd. will, by holding large stocks in the UK, be able to offer distributors quick delivery at selling prices below those of PT Ltd., yet still make a good margin. There is still some doubt as to how much B (UK) Ltd will wish to invest in stock. At present PT Ltd., sats selling prices at a mark-up of 150% to 220% on its costs from A. This mark- up yields a contribution roughly equal to PT Ltd's total overheads, while other products not connected with the components provide a further contribution that makes PT Ltd a profitable company. You are required to: (a) list three major ptions available to PT Ltd regarding its selling prices if it is to increase its profit from the sales of the component. In respect of each option, explain what you consider would be its major effects on PT Ltd's sales, costs and profit; (b) recommend the pricing option that you consider should be adopted, giving briefly the main reasons for your choice
