The Vice President of Marketing of XYZ Manufacturing was considering a change in
ID: 413821 • Letter: T
Question
The Vice President of Marketing of XYZ Manufacturing was considering a change in advertising or price for two brands. The volume, pricing, and cost summary for each product are provided below:
Product X
Product Y
Manufacturing Price
5.00
4.00
Unit Variable Cost
2.50
1.75
Fixed Marketing Costs
$250,000
$400,000
Fixed Manufacturing Cost
$400,000
$600,000
Unit Sales Volume
1,000,000
1,750,000
Total Market Sales
5,000,000
10,000,000
Market Growth Rate
4%
10%
The brand managers for Product X and Product Y have requested to either reduce price by 10 percent or invest an additional $200,000 in advertising.
As V.P. of Marketing how would you respond to each request?
Due to price competition, a price of $4.00 is now being proposed for the product X. How would this new price impact your earlier decision regarding pricing and advertising?
Product X
Product Y
Manufacturing Price
5.00
4.00
Unit Variable Cost
2.50
1.75
Fixed Marketing Costs
$250,000
$400,000
Fixed Manufacturing Cost
$400,000
$600,000
Unit Sales Volume
1,000,000
1,750,000
Total Market Sales
5,000,000
10,000,000
Market Growth Rate
4%
10%
Explanation / Answer
Sales (dollars) of product X = 1,000,000*5 = $ 5,000,000
Effect of 10% drop in price = 5,000,000 *10% = 500,000
Sales (dollars) of product Y = 1,750,000*4 = $ 7,000,000
Effect of 10% drop in price = 7,000,000 *10% = 700,000
We see that 10% price reduction has a higher cost impact, as compared to additional investment of $ 200,00 in advertising. Therefore, as VP of Marketing, I would advise to spend an additional $ 200,000 in Advertising.
The new project Sales of product X = 4*1000000 = 4,000,000
10% price reduction = 4000000*10% = 400,000
This is still more than 200,000. Therefore, the decision would still remain the same as before.
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