1. Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to 0$ and raises price to $500/unit? Comment.
Setting advertising and selling efforts to $0 while raising the price to $500 has the following effects on the Simple Sheet:
Projected Industry Sales, Company Market Share, and Sales Volume stay the same Projected Sales Revenue increases 100% to $34,839,064
Projected Gross Margin per Unit increases 250% to $350
Projected Net Contribution Margin increases 567.8%% to $20,487,345 Projected Net Profit increases 1809.3% to $20,387,345
According to this information, management would be advised to raise price and cut all advertising and selling efforts.
2. Repeat exercise 1 using the Smart Sheet.
Setting advertising and selling efforts to $0 while raising the price to $500 has the following effects on the Smart Sheet:
Projected Industry Sales stay the same
Projected Company Market Share and Sales Volume decrease 100% to 0 Projected Gross Margin per Unit increases 250% to $350
Projected Gross Contribution Margin decreases 100% to 0
Projected Net Profit decreases 474.6% to $-4,000,000
According to this information, management is advised to keep price, advertising and selling efforts at the current level, or to re-run the model at different levels.
3. Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?
Using the solver tool, we find that the profit maximizing levels are:
Price = $275
Advertising = $1,589,271
Selling = $1,033,027
We note that:
Projected Market Share decreases by 10% to 2.7%
Projected Net Profit increases by 24% to $1,324,061
Based on the information, management is advised to implement this policy only if they are looking to increase profits. This is because the increase in profits come at a market share loss of 0.3%. If management is looking to increase market share, the model must be run again to find levels that maximize market share.
4. What if the firm's goal was not to maximize profit, but to maximize market share while maintaining profit at no lower than last year's level. (Hint: Requires Solver—and be sure to start with a feasible level of profit). Compare this policy to the one you found in question 3.
Using the solver tool to maximize D5 with the additional constraint D17 >= C17, we find that the market share maximizing levels are:
Price = $240
Advertising = $1,589,272
Selling = $1,033,028
We note that:
Projected Market Share increases by 20% to 3.6%
Projected Net Profit stays the same
Based on the information, management is advised to implement this policy if they are looking to increase market share. Compared to the previous solution, projected profits are 24% lower, but projected market share is 0.6% higher. A higher market share will allow for more playroom in the future, but a higher profit will allow for better investments. With knowledge of both these levels, management can make more informed decisions based on the opportunity costs and value provided by each scenario.
5. Comment on the strengths and limitations of a response function approach (Smart sheet) like this in practice.
The model, apart from doing standard cost calculations like the Simple sheet, takes into account the change in sales (and therefore market share) due to price, advertising, and sales effort fluctuations. This gives the smart sheet a significant advantage due to that fact that different scenarios can be tested with more accuracy. Using this smart sheet the marketer can answer “what if” questions regarding price, advertising and sales effort budgets; assess opportunity costs of implemented decisions; and determine the value of rejected decisions. Apart from requiring vast...
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