Summary: Length and Format. Case studies for this class require that the body of the paper be 2 to 3 pages long using double spacing, Many of the assignments require quantitative analysis. Show your work clearly. Charts and formulas will often be needed. For this class, charts and calculations may take up the equivalent of page or more Introduction. Provide brief background and summarize what will be covered. Cover the Topics. Use separate headings for each topic. It is best NOT to repeat the questions, but you must be clear on what you are covering where in the paper. Use the book or other credible sources to assist in this effort. Recommendations. You only need to include recommendations if the assignment asks for them. Conclusion. Include a separate conclusion whereby you summarize key points from the assignment. References, Place references in APA format on separate last page. Also use in text citations. Read the following case study and answer questions at the end. FIRE SAFETY INC.: EVALUATING A PRICE INCREASE FOR THE HERO LINE For most of its 10 year product life, the management at Fire Safety Incorporated (FSI) held the price of its HERO line of digital breathing apparatus system (DBA) constant despite growing demand for the technology. That changed in 2001 when FSI raised its price by 5% (from $1485 to $1560) while enjoying increased sales. An initial analysis of the price move led FSI management to conclude that the price increase had added $3,548,625 to the 2001 bottom line. The company intends to repeat that success with another 5% increase in 2002. However, sales management is highly skeptical about this idea. They argue that FSI will lose market share, and ultimately profitability, as a result of these overly aggressive price increases. Industry background Self-contained breathing apparatus systems are worn by fire and rescue personnel in hazardous situations where smoke, poisonous gas or low levels of oxygen inhibit search and rescue operations. They consist of a portable oxygen supply attached to an air-tight face mask which contains a radio communication device to communicate with other rescue personnel. Users can regulate the flow of oxygen to the mask to ensure a continuous supply. Ten years ago, when FSI introduced the HERO line, it was the only supplier of DBA's for fire service in the market. Sales grew year after year as fire and rescue departments adopted HERO for its digital communication capabilities and end of service" alarm. These features significantly reduced death and injury rates associated with oxygen flow malfunction. For example, digital communication technology is 65% more reliable in maintaining radio contact than analog radio. It is estimated that digital communications reduced accidents from lost radio contact by 50% saving approximately 100 lives over the three years after it was introduced. Similarly, the end of service alarm was estimated to save 10 lives over the same period. The National Institute of Occupational Safety and Health (NIOSH) and National Fire Protection Association (NFPA) recently updated the standards for breathing apparatus systems for fire service. The new standards require fire and rescue departments to convert to digital technology. Formal inspections and fines will be used to enforce compliance with the new standards. As a result of the new standards the market grew 29% in 2001. FSI estimates that the market will grow by 44% in the next year. Fire Safety Inc. Almost 100% of FSI's business is conducted with U.S. fire and rescue departments that belong to regional purchasing organizations. Fire and rescue departments in fifty states and territories purchase under contract with FSI through 11 regional purchasing groups. Contracts are one year in length with the exception of the California Region. The California Region's current three-year contract will expire in 2003 at which time it will move to single-year contracting at the same price as all other regions. Independent safety equipment distributors deliver the product and provide training and support to FSI's customers. The contribution margin for customers with the new pricing on HERO DBA's is 64% at the company's variable cost per unit of $560 FSI established the market and standard for quality for DBA's and maintained its list price on HERO for ten years. Last year, FSI shifted its strategy from the historic focus on growing market share to capturing revenue, despite a potential loss of share. New FSI management increased the price of the HEROby 5%. Hero Sales Data 2000 2000 2001 2001 Net $Sales Unit Sales Net Sales 31,698,751 21,345.96 34,622,640 Unit Sales 22,194 8,947,125 6,025 11,132,160 9,475,440 7,136 6,074 8,053,155 5,423 6,667,650 4,490 7,551,960 4,841 Region 1 - Southwest Region 2 - Southeast Region 3 - New England Region 4 - Northwest Region 5 - Mid-Atlantic Region 6 - Central Region 7 - Northern Plains Region 8 - Southern Plains 3,844,665 2,589 4,878,120 3,127 3,017,520 2,032 3,218,280 2,063 1,557,765 1,049 1,388,400 890 638,550 430 890,730 571 739,530 498 653,640 419 19,305 13 0 0 Region 9 - Offshore Region 10 - Alaska Region 11- California Total 30,326,670 20,422 36,828,000 24,800 $95,510,686 64,317 $110,639,400 72,115 Price increase not in effect until 2003 Competition Five years ago, Guardian entered the market with its line of DBA's featuring similar digital communication capabilities and "end of service" alarms. Guardian has gained share since that time and as of today, October 2001, has 42% of the market. Guardian has a manufacturing cost advantage compared to FSI that results from sophisticated production equipment. In recent trade press publications, Guardian has indicated that the production efficiency gains it will achieve over the next 5 years are included in the current prices of its DBA lineto hold market share and avoid the need to reduce prices down the road as price competition increases. Guardian's current price is $1500. QUESTIONS 1. Would you recommend the price increase to FSI management? 2. What objective analysis could you provide to support your recommendation?