Business Management-AW471

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Bach Carpet Company

 
Bach Carpet Company produced high-grade carpeting materials for usein automobiles and recreational vans. Bach’s products were sold to finishers, who cut and bound the material so that it would fit perfectly in the passenger compartment or cargo area (e.g., automobile trunk) of a specific model vehicle. These finishers also made carpet floor mats. Some of these finishers were captive operations of major automobile assembly divisions, particularly those that assembled the “top of the line” cars that included high-grade carpeting; other finishers concentrated on the replacement and van customizing markets.
 

Late in 1993, the marketing manager and the chief accountant of Bach met to decide onthe list price for carpet number L-42. It was industry practice to announce prices just prior to the January-June and July-December “seasons.” Over the years, companies in the industry had adhered to their announced prices
throughout a six-month season unless significant unexpected changes in costs occurred.
 
Bach was the largest company in its segment of the automobile carpet industry; its 1993 sales had been over $40 million. Bach’s salespersons were on a salary basis, and each one sold the entire product line. Most of Bach’s competitors were smaller than Bach; accordingly, they usually awaited Bach’s
price announcement before setting their own selling prices.
 

Carpet L-42 had an especially dense nap; as a result, making it required a special machine, and it was produced in a department whose equipment could not be used to produce Bach’s other carpets. Effective January 1, 1993, Bach had raised its price on .this carpet from $3.95 to $4.75 per square yard. This change had been done in order to bring L-42’s margin up to that of the other carpets in the line.Although Bach was financially sound, it expected a large funds need in the next few years for equipment replacement and possible diversification. The 1993 price increase was oneof several decisions made in order to provide funds for these plans.
 

Bach’s competitors, however,had held their 1993.prices at $3.95 on carpets competitive with LA2. As shown in Exhibit 1, which includes estimates of industry volume on these carpets, Bach’s price increase had apparently resulted in a loss of market share. The marketing manager, Kim Blevins, estimated that the industry would sell about 630,000 square yards of these carpets in the first half of 1994. Blevins was sure Bach could sell 150,000 yards if it dropped the price of L-42 back to $3.95. But if Bach’held its price at $4.75, Blevins feared a further erosion in Bach’s share. However, because some customersfelt that L-42 was superior to competitive products, Blevins felt that Bach could sell at least 75,000 yards at the $4.75 price.
 
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During their discussion, Blevins and the chief accountant, Bill Kirkwood, identified two other aspects of the pricing decision. Kirkwood wondered whether competitors would announce a further price decrease if Bach dropped back to $3.95. Blevins felt it was unlikely that competitors would price below $3.95 because none of them was more efficient than Bach,and there were rumors that several of them were in poorfinancial condition. Kirkwood’s other concern was
whether a decision relating to carpet L-42 would have any impact on the sales of Bach’s other carpets. Blevins was convinced that since L-42 was a specialized item, there was no interdependence between its sales and those of other carpets in the line.
 

Exhibit 2 contains cost estimates that Kirkwood had prepared for various volumes ofL-42. These estimates represented Kirkwood’s best guesses as to costs during the first six months of 1994, based on past cost experience and anticipated inflation.

 

REQUIRED:
 
1. What was the relationship (if any) between the L-42 pricing decision and the company’s future need for capital funds?
 
2. Assuming no other prices are to be considered, should Bach price L-42 at $3.95 or $4.75?
 
3. If Bach’s competitors hold their prices at $3.95, how many square yards ofL-42 would Bach need to sell at a price of $4.75 in order to earn the same profit as selling 150,000 square yards at a price of $3.95?
 
4. What additional information would you wish to have before making this pricing decision? (Despite the absence of this information, still answer question number 2.)
 
5. With hindsight, was the decision to raise the price in 1993 a good one?

 
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