Subject:Managerial AccountingCourse:Add

P&G wants to determine if it should introduce a new, cheaper version of Head and Shoulders shampoo. It asked a focus group which of three products it would prefer at different prices (see Figure 18-13).

For example, if all three products cost $3.60, 70 people prefer Head and Shoulders, 13 prefer Head and Shoulders Lite, 4 prefer CVS, and 13 would buy no dandruff shampoo.

a. calibrate a discrete choice model. Use the same price weight for each product.

b. Suppose the CVS shampoo sells for $3.00. If the unit cost to produce Head and Shoulders is $2.20 and the unit cost to produce Head and Shoulders Lite is $1.40, what pricing maximizes P&G's profit?

c. By what percentage does the introduction of Head and Shoulders Lite increase P&G's profit?

Scanario HS HSLite CVS HS Share HS lite share CVS share None share 3.6 3.6 3.6 70 13 13 2 3.8 2.8 2.6 59 22 7 13 3 4 3 2.7 58 21 7 14 4 4.2 3 2.7 54 23 8 15 5 4.4 3.1 2.6 51 23 17 6 4.6 2.9 2.5 46 27 10 17 7 4.8 3 2.8 44 28 9 19 8 5 3 2.9 41 30 9 20 9 5.2 3 2.6 37 31 11 21 10 5.4 3.1 3 35 32 9 23 11 5.6 3.3 2.8 33 30 12 25 12 5.8 3.5 3.1 32 29 11 28 13 6 3.7 3.2 31 28 11 31 14 6.2 4 3.2 29 25 15 12 34 6.4 4.5 3.4 29 16 20 12 39 6.6 4.7 3.6 28 19 11 42 Figure 18-13: Data for Exercise 3