Cumberland Metal Industries (CMI) should price their new cushioning pads at $900 to maximize profit. CMI should begin by targeting the customers that will find the greatest value in the product an pay the most. This allow the company to maximize unit contribution, and leave available options for dealing with future competition and sales challenges.
CMI estimates a potential customer base of 19,500 to 26,000 actively operating pile drivers in the United States. Currently the marketplace approaches cushion pads as an afterthought; pads are available for $2-$10 depending on size. The pads are produced by various local shops; CMI will be the first major industrial producer in the market.
The introduction of a new and more expensive pad may require some time to gain acceptance in the market place. Many pads are purchased by equipment leasing companies whose incentive is to keep their equipment rented by prolonging the job; this may eliminate rental hammers from the initial market. The remaining market is divided into two groups; Independent contractors who may be skeptical about the cost and large contractors. Large Contractors are the primary market, they are interested in reducing costs, and can afford the more expensive pads, and additionally they are more likely to see the potential value in the product. There are approximately 13,000 active machines in this group. This initial market is likely to understand the value and be accepting of the $900 price.
Using the equipment CMI currently has in place pads can be produced at a variable cost of $44.44 for an 11.5 inch pad. Fixed costs for labor and equipment equal $28.80. The company prefers to consider fixed cost at an amount 360% of labor to account for engineering changing the fixed amount to 103.68. The accounting policy will not accurately reflect the engineering work required to create the pads and could be reconsidered. The pads will subsidize other products. These costs will...
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