Beauregard Textile Company Essay

1968 Words8 Pages
Executive Summary In a desire to increase the company’s working capital for the company’s future financial investment in a plant modernization and expansion program, Beauregard Textile Company increased the price of its Triaxx-30 product to bring its profit margins up to that of their other products. In a sequential-move game theory Calhoun & Pritchard, Beauregard’s primary rival, did not raise its price even though its costs were assumed to be similar. As a result, Beauregard’s unit sales dropped significantly as their customers purchased the cheaper competitor’s product, causing Beauregard’s profit contribution to decrease. A closer examination of Beauregard’s cost analysis revealed that it includes fixed costs, which when…show more content…
The increase in profit margins the firm is seeking on the sale of T-30 should have been gained through cost savings determined through the line by line analysis, saving money in the selling and administration of the factory or in general overhead as opposed to raising the price to $4 per yard. How would the numbers look if Beauregard dropped its price to $3.00? The true variable costs to Beauregard Textiles include the Direct Labor, Material, Material Spoilage, and Direct Department Expense. By excluding those expenses not related to the production of T-30, we can calculate the contribution margin for Beauregard using unit sales price and unit variable cost. Contribution margin is a measurement of the profitability of a product and is an excellent management tool to help determine whether to keep or drop certain aspects of the business. A positive contribution margin means that the company should produce the product, a negative contribution margin means the company is likely to suffer from every unit it produces. Exhibit 4 - Beauregard's Contribution Margins Price
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