The central issue concerns product pricing. The analysis requires the estimation of appropriate costs and assessing price-demand information using past sales data.

The objectives are: to find the different price demand elasticities, costs, revenue profits for these years. And most important: I need to find the optimal PRICE that we should establish for our product in 2008. The price that will give us the biggest profit, taking into account that a change in the price will also affect the demand.

This is the case study:

Permaclean has a product called "Permashine", which they were selling in the beginning at 75$, having 10% of the market share.

However, the accountant of the company indicated that the total cost of Permashine was greater than the current selling price of 75p, as you can see in the table 201.1.

As a result, the selling price was increased to 99p. Although total industry sales continued to rise during 2006 and 2007, Permashine suffered a reduction in both its market share and its total sales, as shown in Exhibit 201.2. , so they have to find a new price.

Exhibit 201.1 Estimated costs of Permashine at various production volumes Cost (p/bottle) Annual production ('000 bottles) 250 300 400 500 600 700 800 Direct labour 17.5 17.5 17.0 17.0 17.0 17.5 18.0 Materials 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Dept.overhead Variable 9.0 9.0 9.0 9.0 9.0 9.0 9.0 Fixed 14.4 12.0 9.0 7.2 6.0 5.1 4.5 Factory overhead (20% of direct labour) 3.5 3.5 3.4 3.4 3.4 3.5 3.6 Factory cost 52.4 50.0 46.4 44.6 43.4 43.1 43.1 Selling & administration cost at 80% of factory cost 41.9 40.0 36.3 35.7 34.7 34.5 34.5 Total cost 94.3 90.0 82.7 80.3 78.1 77.6 77.6 Exhibit 201.2 Permashine: sales and price 2001 2002 2003 2004 2005 2006 2007 Permashine sales ('000 bottles) 400 429 486 525 536 462 391 Total industry sales ('000 bottles) 2000 2050 2250 2200 2300 2650 2900 Permashine % of market 20 21 22 24 23 17.5 13.5 Permashine price (p) 60 70 70 75 75 99 99 Competitors' price range (p) 56-62 65-70 65-70 69-75 69-75 70-80 75-80