Cumberland Case
1. Q1-1) What price would you charge for the Cumberland pad?
According to the six stages of setting price, ①we have to select the pricing objective. Since Cumberland is in the level of introducing CMI, they have to pursue product-quality leadership which is to offer “affordable luxuries” for now and consider about maximizing profit later. ②The second stage is to determine demand. So, Cumberland has to consider consumers’ price sensitivity - in this case sensitive to quality. Therefore, we should think about the benefit to consumers (in question 1-2 EVC)
③Third step is to estimate costs. Since the average number of CMI pads need per year is 204,750(question 2), the number of CMI pads per month is about 17,000. So, the additional capacity cost is $5,025,000 because additional equipment is added at a cost of $75,000 per 250 pads per month of capacity {(17,000/250 – 1)x75,000}. The production cost varies depending on purchasing a permanent tool. (Exhibit 6)Without permanent tool, it has to pay $7,543,040{148.12x17,000+5,025,000(additional capacity cost)}. On the other hand, with the permanent tool, manufacturing cost would be only $6,251,060{69.18x17,000+50,000(price of permanent tool)+5,025,000(additional capacity cost)}. Compared to 'without permanent tool case ', it is reasonable to produce pads ‘with permanent tool’. So the total manufacturing cost would be $6,251,060 and the manufacturing cost per pad goes to $367.71(6,251,060/17000). Since Cumberland managements want to take manufacturing cost to be 40~50% of the price. From this, we can set the price range of from $735.42. to $919.275.
④Next, we should analyze competitors’ price mix. Competitors of this market are companies producing asbestos pads. The advantage of competitors is low price. Thus Cumberland has to make sure the value it offers is always of higher benefit to customers than asbestos pad’s cheapness. ⑤From this, it follows that the ceiling price should be about $1,904.16 and floor price about
According to the six stages of setting price, ①we have to select the pricing objective. Since Cumberland is in the level of introducing CMI, they have to pursue product-quality leadership which is to offer “affordable luxuries” for now and consider about maximizing profit later. ②The second stage is to determine demand. So, Cumberland has to consider consumers’ price sensitivity - in this case sensitive to quality. Therefore, we should think about the benefit to consumers (in question 1-2 EVC)
③Third step is to estimate costs. Since the average number of CMI pads need per year is 204,750(question 2), the number of CMI pads per month is about 17,000. So, the additional capacity cost is $5,025,000 because additional equipment is added at a cost of $75,000 per 250 pads per month of capacity {(17,000/250 – 1)x75,000}. The production cost varies depending on purchasing a permanent tool. (Exhibit 6)Without permanent tool, it has to pay $7,543,040{148.12x17,000+5,025,000(additional capacity cost)}. On the other hand, with the permanent tool, manufacturing cost would be only $6,251,060{69.18x17,000+50,000(price of permanent tool)+5,025,000(additional capacity cost)}. Compared to 'without permanent tool case ', it is reasonable to produce pads ‘with permanent tool’. So the total manufacturing cost would be $6,251,060 and the manufacturing cost per pad goes to $367.71(6,251,060/17000). Since Cumberland managements want to take manufacturing cost to be 40~50% of the price. From this, we can set the price range of from $735.42. to $919.275.
④Next, we should analyze competitors’ price mix. Competitors of this market are companies producing asbestos pads. The advantage of competitors is low price. Thus Cumberland has to make sure the value it offers is always of higher benefit to customers than asbestos pad’s cheapness. ⑤From this, it follows that the ceiling price should be about $1,904.16 and floor price about