EXECUTIVE SUMMARY
Cumberland Metal Industries is evaluating a new product that makes pile driving less costly and more efficient. The product is a cushion pad made from curled metal that prevents the shock of a hammer from damaging the hammer or the pile. Currently the industry uses asbestos pads and is the only form of competition the company faces. If adopted there is potential to sell 29,000 to 39,000 sets of pads (6 pads per set) annually. The most important issue CMI management faces is setting the price of each pad, in the words of Robert Minicucci “ The way we price this could have a significant impact on everything else we do with it.” CMI will consider a range or pricing options such as cost based pricing, competitor based
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Provided that CMI chooses to invest $50,000 the costs are as such:
Manufacturing cost = 69.18
Contribution Margin (50% of selling price) = 69.18
Total Price = $138.36
WIthout investment:
Manufacturing Cost = 148.12
Contribution Margin(50% of selling price) = 148.12
Selling Price = $296.24
Using this method CMI can ensure it meets it’s contribution margin requirements, but this method does not consider the savings of efficiency and reduced change time.
Competitor Based pricing
In this method CMI will price their products at a similar price to Asbestos pads. In the Colerick test the total number of sets of Asbestos pads used = 20 and cost per set = $50. The total cost of the job was $1000.00. In the Fazio Construction test the cost per set = $40 and number of sets used = 50. We can use this data to give us a range of how much the cushion pads should cost to be competitive.
Colerick Total Cost for job = 20 * 50 = $1000 Fazio Cost for job= 40*50=$2000
Number of Cushion Pads used= 6 Number of Cushion Pads= 5
Cost per cushion pad = 1000/6= $166.67 Cost per cushion pad=$400
To be competitive CMI must price their product in between this range, a good estimate is $300.00. Provided CMI invests in permanent tooling it will still provide a good profit and be a very competitive price.
Value Based Costing
Value based Costing takes into account all the other
• The first alternative we will focus on is the Economic Value to the Customer (EVC). Hence we have to determine the price that will make a risk-neutral customer, who considers only economic benefits, indifferent between buying either our cushion pad or the ones supplied by alternative offers. We first measure the added values of CMI’s pad compared to a conventional one, then we monetize it, and finally decide the amount we are willing to leave on the table in order to make our product more attractive to the customer. The EVC is measured on the basis of both Kendrick and Corey data (see appendix 1). Looking at Kendrick first we found that the EVC was $4.260,4 and after leaving 40% to the customer, we priced the pad at $2.556,24. Based on Corey’s figures, the EVC was $5.712,58 and after leaving 40% to the customer the price was $3.427,49 per pad.
S.P. is admitted to the orthopedic ward. She has fallen at home and she has sustained an intracapsular fracture of the hip at the femoral neck. The following history is obtained from her: She is a 75-year-old widow with three children living nearby. Her father died of cancer at age 62; mother died of heart failure at age 79. Her height is 5’3 and weighs 118 pounds. She has a 50 pack year smoking history and denies alcohol use. She has severe Rheumatoid Arthritis (RA) and had an upper GI bleed in 1993 and had Coronary Artery Disease with CABG 9 months ago. Since that time, she has engaged in “very mild exercise at home.” Vital signs are 128/60, 98, 14, 99 degree farenheight (32.7 degrees C) SAO2 94%
To calculate optimal pricing I used MC outlined in the case as based on volume of drives produced weekly. Fixed costs of plant and equipment were not included in this analysis although are later evaluated for breakeven time frame.
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CMI was first manufacturer for CM pads, there was no direct competition and no available selling price in the market that CMI can take reference to. In view of that, CMI could use two test results of Kendrick and Corey to determine the economic value of CM pads. According to the Appendix I, the average economic value of CMI pad was 3,304. This value had taken into account of less CM pads required per job and the cost saving in equipment and labor . But the value to the customer should be higher due to some intangible advantage, for examples, lower accident claim as fewer set changes required for CM pads. Besides, lower health claim as CM pad contained non-toxic material. In order to gain the market share for this new product, we would recommend CMI to set the price of CMI pad around 85% of economic value, saying 2,805, promote to the market that it was much cheaper to use CM pads with superior performance and cost efficiency. Besides, different discounts can be granted to the customers depend on the length of the contracts signed and volume of the pads purchased, ranging from 10% to 25%.