Pricing Strategy

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Swing v. Steady

Swing Manufacturing and Steady Manufacturing both operate in the widget industry, but with radically different cost structures. Swing is a capital-intensive, automated manufacturer, while Steady is a labor-intensive "job-shop." Monthly operating data are as follows:

| |Swing Manufacturing |Steady Manufacturing | |Sales |5,000 units |5,000 units | |Price |$10.00 |$10.00 | |Variable |$2.50 |$5.50 | |Fixed Cost |$35,000/month |$20,000/month | |Full Cost |$9.50 |$9.50 | |Current Profit |$2,500/month |$2,500/month |

Please answer the following questions. DO NOT calculate the profitability of these changes by calculating profit levels before and after the changes, spreadsheet style. That approach would take four times longer and not show me that you understand the formulas. Use the simple concept of contribution to calculate just the change in profits due to the proposed price changes.

Swing and Steady both currently have equal (50%) shares of the market. Each is evaluating opportunities to enhance profits. One opportunity involves selling to a low-value, but potentially high-volume, market segment not currently served by either company. The potential increase in sales for either company entering that market alone would be at least 40% (2000 units). If they both entered, the potential sales increase would be at least 20% for each of them. Unfortunately, reaching that market would require pricing at $8.50, 15% below current levels.

(a)If either company could costlessly...
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