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 excluded, the decision to raise the price of Triaxx-30 was unnecessary. Thus, when Beauregard raised its price, it was in the best interest of Calhoun & Pritchard to leave their price unchanged. In the end, Beauregard needs to reduce its price to its previous level in order to regain the majority of the market share and increase their profits. Brief Review of Issues Addressed in the Case
The Beauregard Textile Company case begins with the sales manager and the controller for Beauregard evaluating their options to determine a pricing strategy for the next quarter of a textile product that has lost significant market share to a competitor. Over the past three quarters, Beauregard increased the price of its Triaxx-30 product from $3 per yard to $4 per yard. This increased price reflected an adjustment to bring the profit margin of Triaxx-30, referenced in the industry as T-30, to align with other products and recent increases in production cost. Calhoun and Pritchard, Beauregard’s only significant rival in this market duopoly, typically announce their own pricing of the T-30 after Beauregard set its fabric prices for the quarter. While Beauregard has increased its prices over the past few quarters, Calhoun and Pritchard did not change its price in response even though both companies have similar production costs and Calhoun and Pritchard are in a tight financial situation due to a recent takeover defense. Following Beauregard’s price increase, the consumers’ responses revealed that they are willing to substitute to the lower cost product even though the two products are not identical, causing Beauregard to lose a considerable market share. What are the financial results for Beauregard that Beal and Calloway should be looking at with respect to the present pricing agreement?
In a desire to increase the company’s working capital for their future financial investment in plant modernization and expansion program, the sales manager and the controller for Beauregard, Beal and Calloway, first need to perform a line by line analysis of all the factors involved in their pricing decision. Conducting an in-depth analysis will allow Beal and Calloway to identifying the internal and external factors that affect their ability to achieve high returns in the production of T-30. After initial review of the current cost and sales analysis of Beauregard T-30 production as presented in the case, the firm appears to be reducing their profitability significantly when selling their product at the increased price of $4 per yard. The current cost analysis provided by Beauregard Textiles considers costs that are not relevant to the firm’s pricing decision, such as depreciation and administrative costs incurred for the production of T-30.
Exhibit 3 - Beauregard's Current Cost Analysis
B - 4, CP - 3
B - 3, CP - 3
B - 4, CP - 4
VC - Direct Labor
VC - Material
VC- Material Spoilage
VC - Indirect labor, supplies, repairs, power,…
11,200 VC - Depreciation, Supervision, etc.
VC - General Overhead (30% direct labor)
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