Lille Tissages, S.A is a French company located in Lille. It was the largest company in the textile industry in France.
During its activity, the company got in 2003 a good year with sales exceeding FF96million.
One of the items of the company, Item 345 - a sole product for the company - saw its price raised in 2002 from FF15 to FF20 a meter. This decision has been taken in order to strengthen the capital position.
However, the competitors kept their price at FF15 for similar items and the company Lille Tissages, S.A lost market shares. Consequently, the sales director is afraid that because Lille Tissage does not meet the competitive price the volume of sales will decrease significantly.
This is the reason why the marketing director and the finance director of Lille Tissages, S.A have to manage today a decision about the price of Item 345 in order to prepare a joint pricing recommendation for 2004.
Indeed, they have to evaluate the interest of lower the price. In order to make the best decision for the company and its shareholders they have to consider the two solutions and evaluate their interest for the company.
For this consideration, they have to see what are the advantages and disadvantages of each solution. More precisely, thy have to take a look at what happen to the variable costs and the contribution margin.
Question 1 : Should Lille Tissages change the price from FF20 to FF15?
In order to answer to this question, the marketing director and the finance director need to consider the variable costs and the contribution margin for the two solution for the price of item 345 : FF20 and FF15 and analyze the advantage and disadvantage of each one.
The question is what effect will have the change of price? Changing the price will affect the contribution margin (sale price – variable cost).
To remind the variable cost is “is the sum of marginal costs over all units produced” which in this case are: the direct...