EVC analysis
Harbor East Auto Finish is the best car polish and paint protection available anywhere. It is a substitute for regular wax and sold in a bottle that is adequate for one application to one car. Regular wax, which is sold in a container that is enough for two applications, costs about $4.00/container. Harbor East protects and maintains the shine of a car’s finish at least 20% longer than regular car wax. It needs 2 hours to apply Harbor East, the same as regular wax. The labor cost is $5.00 per hour. Some cars have oxidized paint (no shine) at the time wax is to be applied, requiring cleaning with an oxidation cleaner before one can apply regular car wax. Oxidation cleaner costs $2.50 per bottle (good for one application) and needs 2 hours to be applied. However, Harbor East removes the oxidation and shines the car’s surface in one step. Harbor East can also be applied directly to a car’s surface that is already highly oxidized. Use EVC=Reference Value + Differentiation Value if possible.
1) Estimate the EVC of Harbor East Auto Finish for consumers whose cars require cleaning with an oxidation cleaner before applying regular car wax and consumers whose cars do not require an oxidation cleaner.
2) There are a number of factors that influence price sensitivity other than EVC. Consequently, it may the case the customers would not be willing to pay as much as this product is really worth. Please identify at least two other factors that could influence how much people would be willing to pay for this product and briefly state the marketing effort you can make to influence their willingness to pay or price sensitivity. Please refer to the textbook on the 8 factors affecting price sensitivity.
- Incremental Break-even analysis
PQR manufactures and markets home video equipment. One of the most popular items in the company’s product line is a video tape player at $250 each. Sales have been growing rapidly and are expected to reach 4,800 units in the next year if the price remains unchanged. Variable costs are $112.50 per unit. Despite its projected growth in sales at the current price, PQR is considering a 5% price cut to remain competitive and retain its share in this rapidly growing market. Since the cut would be implemented in the next year, the initial sales level, or baseline is next year’s projected sales (4,800 unites). Production capacity is currently limited to 5,000 units but can be increased by purchasing equipment which costs $15,000 for each additional 1,000 units of capacity.
1). Calculate the total contribution before the price cut and after the price cut assuming total sales volume stays the same (4,800 units).
2). Calculate the breakeven sales (units and percentage) for a 5% price cut assuming there is no change of relevant variable cost.
3). Suppose the variable cost is decreased by $12.5. Given that PQR can manufacture home video equipment at a lower variable cost, the management is considering a 5% price cut. By how many units sales has to change to maintain the same profit (the baseline case is P1=250 and S1=4800)?
