Price Quotes and Pricing Decisions Applied Problems
Please complete the following two applied problems:
Problem 1:
Jessica Alba, a famous actress, starts the baby and family products business, The Honest
Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose
what kinds of non-toxic, all-natural products they'd like to use and get them in a bundle. Families
can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose
they are thinking of expanding their business into five domestic markets: Phoenix, Dallas,
Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize
economic profits, although they want to do business honestly.
Show all your calculations and process. Describe your answer for each question in three- to fivecomplete sentences.
a. You are a business adviser for Alba and Gavigan. Describe a skimming price and a
penetration price, and advise them whether they should charge a skimming price or a
penetration price, with supportive reasoning for and against each pricing alternative.
b. Are they likely to make economic profits initially? Can they continue to make
economic profits in the long term? Why or why not? Discuss.
c. What advice would you give to Alba and Gavigan to help them make more profit in the
long term?
Problem 2:
You operate your own small building company and have decided to bid on a government contract
to build a pedestrian walkway in a national park during the coming winter. The walkway is to be
of standard government design and should involve no unexpected costs. Your present capacity
utilization rate is moderate and allows sufficient scope to understand this contract, if you win it.
You calculate your incremental costs to be $268,000 and your fully allocated costs to be
$440,000. Your usual practice is to add between 60% and 80% to your incremental costs,
depending on capacity utilization rate and other factors. You expect three other firms to also bid
on this contract, and you have assembled the following competitor intelligence about those
companies. Issue Rival A Rival B Rival C Capacity
Utilization At full capacity Moderate Very low Moderately
concerned Not concerned Medium sized
and efficient
plant Large and very
efficient plant Goodwill
Very concerned
Considerations Production
Facilities Small and
inefficient plant Previous
Incremental cost Full cost plus 8Bidding Pattern plus 35-50%
12% Cost Structure Aesthetic
Factors Incremental
costs exceed
yours by about
10% Similar cost
structure to
yours Does not like
winter jobs or
dirty jobs Does not like
messy or
inconvenient
jobs Full cost plus
10-15% Show all of your calculations
and processes. Describe your
Incremental
answers in three- to fivecosts 20% lower
complete sentences.
but full costs are
similar to yours Likes projects
where it can
show its
creativity Political Factors Decision maker Decision maker Decision maker
is a relative of is seeking a new is looking for a
the buyer
job
promotion a. What price would
you bid if you must
win the project?
b. What price would
you bid if you want
to maximize the
expected value of
the contribution
from this contract? c. Defend your
answers with
discussion, making any assumptions you feel are reasonable and/or are supported by
the information provided.

 

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