Cumberland Case

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1. Q1-1) What price would you charge for the Cumberland pad? According to the six stages of setting price, ①we have to select the pricing objective. Since Cumberland is in the level of introducing CMI, they have to pursue product-quality leadership which is to offer “affordable luxuries” for now and consider about maximizing profit later. ②The second stage is to determine demand. So, Cumberland has to consider consumers’ price sensitivity - in this case sensitive to quality. Therefore, we should think about the benefit to consumers (in question 1-2 EVC) ③Third step is to estimate costs. Since the average number of CMI pads need per year is 204,750(question 2), the number of CMI pads per month is about 17,000. So, the additional capacity cost is $5,025,000 because additional equipment is added at a cost of $75,000 per 250 pads per month of capacity {(17,000/250 – 1)x75,000}. The production cost varies depending on purchasing a permanent tool. (Exhibit 6)Without permanent tool, it has to pay $7,543,040{148.12x17,000+5,025,000(additional capacity cost)}. On the other hand, with the permanent tool, manufacturing cost would be only $6,251,060{69.18x17,000+50,000(price of permanent tool)+5,025,000(additional capacity cost)}. Compared to 'without permanent tool case', it is reasonable to produce pads ‘with permanent tool’. So the total manufacturing cost would be $6,251,060 and the manufacturing cost per pad goes to $367.71(6,251,060/17000). Since Cumberland managements want to take manufacturing cost to be 40~50% of the price. From this, we can set the price range of from $735.42. to $919.275. ④Next, we should analyze competitors’ price mix. Competitors of this market are companies producing asbestos pads. The advantage of competitors is low price. Thus Cumberland has to make sure the value it offers is always of higher benefit to customers than asbestos pad’s cheapness. ⑤From this, it follows that the ceiling price should be about $1,904.16 and floor price about $735.42 and its median is $1,319.79. After this, we select a pricing method of markup pricing. Because we are beginning the production, we have to first accomplish desired return on sales to make up for the costs. ⑥Lastly, we select a final price with this method. As gather up former steps, although CMI pad’s EVC is very high and consumer will be welcome this product, since it is the beginning and the key point is to penetrate market and take consumer’s interest, S875.5 of which 42% is manufacturing cost is moderate to CMI pad. Q1-2) What is the best estimate of the value of the Cumberland pad to a customer? First, in the Colerick project, Asbestos pads' driving rate is 150ft/hr so it takes 100 hours driving 15,000ft. When driving 15,000ft, it needs 20 pad sets. Also, because it spends 20 minutes to change sets, it takes total of 400minutes to change sets. As a result, total time spending on driving 15,000ft would be 106.66666hrs (100hrs+400mins). However, the driving rate of CMI pad is 200ft/hr and it takes 75hrs to drive 15,000ft. CMI needs only 1 pad set change which takes only 4minutes. So, driving 15,000ft with CMI pad spends 75.06666hrs (75hrs+4mins). It saves 31.6hrs than the Asbestos pad. Second, in the Fazio project, the driving rate of Asbestos pads is 160ft/hr and it takes 75hrs driving 12,000ft. In this case, 50 pad sets is needed to replace and it takes 20minutes per set to change. So it needs 1000mins for total changes. Overall, using Asbestos pads needs 91.66666hrs (75hrs+1000mins). On the other hand, CMI in Fazio project shows same result with Colerick project that is taking 60.06666hrs. In summary, it saves 31.6hrs when using CMI pad. Furthermore, there are other equipment’s rental costs. Hammer costs $34/hr, crane costs $52/hr and lead costs $8/hr. Also, labor cost is $21, crane operator costs $10 and foreman costs $13. In addition, $100 is needed for overhead which is spent on office, trucks, oil/gas, tools etc. In sum, $238 is spent per hour. To sum...
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