Sheridan's competitors, however, had held their 1982 prices at $3.90 on carpets competitive with 104. As shown in Exhibit 1, which includes estimates of industry volume on these carpets, Sheridan's price increase had apparently resulted in a loss of market share. The marketing manager, Mel Walters, estimated that the industry would sell about 630,000 square yards of these carpets in the first half of 1983. Walters was sure Sheridan could sell 150,000 yards if it dropped the price of 104 back to $3.90. But if Sheridan held its price at $5.20, Walters feared a further erosion in Sheridan's share. However, because some customers felt that 104 was superior to competitive products, Walters felt that Sheridan could sell at least 65,000 yards at the $5.20 price. During their discussion, Walters and the chief accountant, Terry Rosen, identified two other aspects of Rosen wondered whether the pricing decision. competitors would announce a further price decrease if Sheridan dropped back to $3.90. Walters felt it was unlikely that competitors would price below $3.90, because none of them was more efficient than Sheridan, and there were rumors that several of them were in poor financial condition. Rosen's other concern was whether a decision relating to carpet 104 would have any impact on the sales of Sheridan's other carpets. Walters was convinced that since 104 was a specialized item, there was no interdependence between its sales and those of other carpets in the line. Exhibit 2 contains cost estimates that Rosen has prepared for various volumes of 104. These estimates represented Rosen's best guesses as to costs during the first six months of 1983, based on past cost experience and anticipated inflation. QUESTIONS 1. 2. 3. 4. Assuming no intermediate prices are to be considered, should Sheridan price 104 at $3.90 or $5.20? If Sheridan's competitors hold their prices at $3.90, how many square yards of 104 would Sheridan need to sell at a price of $5.20 in order to earn the same profit as selling 150,000 square yards at a price of $3.90? What additional information would you wish to have before making this pricing decision? (Despite the absence of this information, still answer Question 1!) With hindsight, was the decision to raise the price in January of 1982 a good one? EXHIBIT 2 ESTIMATED COST OF CARPET 104 AT VARIOUS PRODUCTION VOLUMES First Six Months of 1983 Costs/sq.yd. Raw materials Materials spoilage Direct labor Department overhead: Direct* Indirect (A) General overhead (B) Factory cost Selling and administrative (C) Total cost 65.000 87,500 $0.520 $0.520 0.052 0.051 1.026 0.989 0.142 0.136 1.200 0.891 0.308 0.297 3.248 2.884 2.111 1.875 $5.359 $4.759 Volume (square yards) 110,000 $0.520 0.049 0.979 *Materials handlers, supplies, repairs, power, fringe benefits. (A) Supervision, equipment depreciation, heat and light. (B) 30 percent of direct labor. (C) 65 percent of factory cost. 0.131 0.709 0.294 2.682 1.743 $4.425 150,000 $0.520 0.049 0.962 0.130 0.520 0.289 2.470 1.606 $4.076 185.000 $0.520 0.051 0.975 0.130 0.422 0.293 2.391 1.554 $3.945 220.000 $0.520 0.052 0.997 0.130 0.355 0.299 2.353 1.529 $3.882