The Premium Pen Company (PPC) designs and manufactures high quality fountain pens. It produces pens with cutting edge designs that last a lifetime. PPC operates in a highly competitive environment and hence is unable to charge very high prices for its products.

PPC's pens are designed by its design department which employs highly talented designers. The pens are then manufactured in PPC's factory which uses skilled manual labour. PPC is currently producing 5 different pen models (or products) where each model is manufactured in relatively small quantities due to the manual nature of the manufacturing process.

While PPC's 5 different pen models have varied designs, they share some of the raw materials - i.e., resin and vulcanised rubber. However, what sets each pen apart from the next is the material used to make the pen's nib. Some of the materials that PPC uses for the nib are gold, platinum and stainless steel. The decision on which nib to use for a particular pen is made by the design department. This choice also impacts the amount of labour cost incurred to manufacture the pen as some materials are easier to work with than others.

Question 27

What is the long-term pricing approach that PPC should use for its pens? Explain.

Question 28

When is a pen's manufacturing labour cost locked-in for PPC? Explain.

Question 29

Why is having an understanding of when costs are locked-in important for PPC?