# Price Quotes and Pricing Decisions Applied Problems

| April 22, 2018

## 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 five-complete sentences.

1. 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.
2. Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
3. 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

Goodwill Considerations

Very concerned

Moderately concerned

Not concerned

Production Facilities

Small and inefficient plant

Medium sized and efficient plant

Large and very efficient plant

Previous Bidding Pattern

Incremental cost plus 35-50%

Full cost plus 8-12%

Full cost plus 10-15%

Cost Structure

Incremental costs exceed yours by about 10%

Similar cost structure to yours

Incremental costs 20% lower but full costs are similar to yours

Aesthetic Factors

Does not like winter jobs or dirty jobs

Does not like messy or inconvenient jobs

Likes projects where it can show its creativity

Political Factors

Decision maker is a relative of the buyer

Decision maker is seeking a new job

Decision maker is looking for a promotion

1. What price would you bid if you must win the project?
2. What price would you bid if you want to maximize the expected value of the contribution from this contract?
3. Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.

Carefully review the Grading Rubric (Links to an external site.)Links to an external site. for the criteria that will be used to evaluate your assignment.

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