The sales director and controller need to choose an expense for just about any textile that lost significant business consequently from the recent cost increase. Information on manufacturing costs and also on the costs behavior of Beauregard which is only competitor are available to analysis. The case provides an opportunity to rehearse contribution analysis, considering fixed and variable costs as reported in the typical cost report. Also tests the students' capacity to acknowledge the requirement to consider the problem within the competitor's perspective. Finally, it poses a prisoner's dilemma for your two firms where each prefer to some prices unfavorable to a different to make sure that cost is likely using the idea to become unstable to be able to be stable inside a suboptimal level for parties. The course can close with students attempting to plot a prices strategy which will attain the perfect level.
However, when utilizing the current cost model and sales figures, the full cost analysis at each price point shows there was no value gained in raising the price above $3 per yard and should reduce their price to the previous level. The increase in profit margins the firm is seeking on the sale of T-30 should have been gained through cost savings determined through the line by line analysis, saving money in the selling and administration of the factory or in general overhead as opposed to raising the price to $4 per yard. How would the numbers look if Beauregard Textile Co Case Solution dropped its price to $3.00?
The true variable costs to Beauregard Textile Company Case Solution include the Direct Labor, Material, Material Spoilage, and Direct Department Expense. By excluding those expenses not related to the production of T-30, we can calculate the contribution margin for Beauregard using unit sales price and unit variable cost. Contribution margin is a measurement of the profitability of a product and is an excellent management tool to help determine whether to keep or drop certain aspects of the business. A positive contribution margin means that the company should produce the product, a negative contribution margin means the company is likely to suffer from every unit it produces. Exhibit 4 - Beauregard's Contribution Margins
When the expenses not related to the sale of T-30 are excluded and our cost analysis shows a more desirable result and again, shows there is no need to raise the price above $3 per yard unless Beauregard Textile Company pdf was able to convince Calhoun and Pritchard to follow suit, which so far has been unsuccessful by increasing their sales figures and profit margins by the price conscious consumers switching to a comparable product. Calhoun and Pritchard presumably are showing a loss of $3.00. Why then is it not raising its price?
Assuming a similar cost structure to Beauregard, Calhoun and Pritchard are most profitable when undercutting Beauregard's higher pricing by the increased volume of T-30 sold. It is in Calhoun and Pritchard's best interest for Beauregard to continue selling T-30 at $4 per yard. When we look only using the variable cost associated with the production of T-30, as suggested in Exhibit 4, Calhoun and Pritchard are able to sustain a $3 per yard price without any additional line by line cost cutting analysis so long as Beauregard continues to charges $4 per yard. Additionally, it is unlikely that Calhoun and Pritchard are using the same accounting practices or sales incentives as Beauregard, which enables them to remain confident in their current pricing scheme.
With Calhoun & Pritchard using the sequential-move game theory, their max profits are realized when they are able to capture the majority of the market share which occurs when Beauregard Textile Co Case Study charges $4 per yard. Using the gaming analysis in Exhibit 6, it shows that Calhoun and Pritchard's dominate strategy is to charge $3. While both firms reach the highest level of profitability at $4 per yard, the market for T-30 is reduced by 20% which makes it more likely for one of the firms to look for the competitive advantage by dropping their price to capture those lost sales.
When Beauregard charges $3 per yard, Calhoun and Pritchard show a loss using the same cost analysis. In order for Calhoun and Pritchard to be profitable using this cost analysis when both companies charge $3 per yard is to cut cost in the Selling/Administrative/Overhead variable expenses and convert depreciation and supervision costs to a fixed structure.
By setting the price at or exceeding full cost does not always assure company profitability nor does it guarantee that a company's profits will be maximized. For Beauregard to reach their optimal cost structure, expenses need to be analyzed line by line. Suggested cost savings and an alternative accounting methodology are shown in Exhibit 8 which shows Beauregard Textile Co could continue to charge $4 per yard and cover the full cost of their product's output in the hopes that Calhoun & Pritchard eventually follow suit. However that seems unlikely given Calhoun and Pritchard's dominant strategy to charge $3 per yard and the 20% decline in sales both firms would expect at the higher rate. Therefore Beauregard's most profitable move is the lower their current price of $4 per yard to the previous level of $3 per yard and investigate the below cost cutting recommendations. •Adjust the Indirect Department Expenses to fixed cost.
Quarterly Prices and Sales Volumes for T-30 Fabric, 1988-1990
Beauregard’s Estimated Cost per Yard of Triaxx-30 at Various Volumes of Production
Contribution Margin Calculations
Case 1Beauregard Textile Company drops its price to $3 for 4th Quarter
Case 2Beauregard Textile Company Keeps its price to $4 for 4th Quarter
Case 3Beauregard Textile Company Keeps its price to $4 for 4th Quarter while Calhoun and Pritchard raises its prices to $4
Case 4Beauregard Textile Company Keeps its price to $3 for 4th Quarter while Calhoun and Pritchard raises its prices to $4
What are the financial results for Beauregard Textile Company that Beal and Calloway should be looking at with respect to the present pricing arrangement?
What is the contribution per yard, and what is the total contribution, at the $4 price? How would the numbers look if Beauregard Textile dropped its price to $3.00?( Note that you must determine the relevant costs that should be included in computing the contribution per yard.)
Calhoun and Pritchard presumably is showing a loss at $3.00. Why then is it not raising its price? (Assume similar costs).
What happens to Calhoun and Pritchard if Beauregard Textile drops its price to $3.00?
What price should Beauregard charge? Why?
How might Beauregard Textile persuade Calhoun and Pritchard to rise its price WITHOUT violating the antitrust laws which prohibit collusion on pricing between competitors?