Case Study ‘What Price Promotion?’

You work for a newly created company which is about to launch a new type of canned soft drink into the soft drink market. Your managing director has asked you to consider and research possible short- and long-term pricing strategies for the new product.

You are to write up findings of your research and make recommendations in a full report. The document should be produced using a wordprocessor. A spreadsheet can be used to make calculations and generate graphs to import into your report where appropriate.

You have made the following list of tasks to complete before you begin to write up your report:

Tasks:

1. Set up a table in a spreadsheet with 6 columns and 6 rows. Label the columns in the first row in the following order: number of cans, fixed costs, total variable costs, total costs, total revenues (1), total revenues (2).

2. Calculate the total cost of producing a range of outputs from 0 to 2 million (in steps of 500,000 cans). Annual costs for the new drink are identified as follows:

• Fixed costs (incl. rent, rates, and overheads) £200,000

• Variable costs per can (labour and materials) £0.1

Complete columns 1 – 4 in the table accordingly.

Plot a total cost line on a graph. Remember to label the axes appropriately.

3. Calculate the average cost of producing each can of drink at each level of output. Choose an appropriate price per unit for your product to cover your costs of production and earn a reasonable level of profit at a given level of output.

4. Use your chosen price to calculate expected total revenues for sales of between 0 and 2 million cans. Use this information on total revenues to complete column 5 in the table. Also complete the graph started in task 3 and find the break-even level of output.

5. Confirm the break-even level of output from the graph using the algebraic equation:

TR=TC; TR= Price x Q; TC= FC+(VC x Q);

6. Investigate the range of prices offered by rival firms in the market. Write up the findings of your investigation and describe a possible pricing strategy to establish the new product in the market. Explain the possible reaction of competitors.

7. How, if at all, does the price per can chosen in task 7 differ from the chosen price in task 3? If the price differs, recalculate expected total revenues for a range of outputs above zero.

8. What is the impact of this new price on the break-even level of output? Show this on a new graph of total costs and total revenues for a range of outputs above zero.

9. Consider medium-term pricing objectives for when the product’s market position has been established. What pricing strategy could be adopted in the event of its losing market share to new competition? What would be the aim and likely effect of this strategy?

10. Write up your findings and recommendations in a report. This should include an explanation of why break-even analysis is useful to new and existing business organisations.