Lille Tissages
FINANCIAL MANAGEMENT
MIDTERM PAPER
EXECUTIVE SUMMARY 3
QUESTIONS 4
CONCLUSION 8
EXHIBIT-1 9
EXHIBIT -2 10
EXECUTIVE SUMMARY
Lille Tissages is located in Lille, France and it is the largest textile company in the region. The department whose financial management is under scrutiny in this case study sells only Item 345. The price for Item 345 was raised from FF15 to FF20 in 2002, which resulted in decrease in market share of Lille Tissages for item 345.
The company is facing stiff competition and the management of the department is forced to rethink its pricing strategy for Item345. The sales director proposed that if the department decides to reduce the price of Item345 to 15 French francs, the company would be able to increase the market share to 25% from the current 20%. The market volume is expected to grow from 625,000 units to 700,000 units; this would mean the sales for 2004 would be 175,000 units.
If the company was to keep the price at 20 French francs, which is the current price, the sales would only be able to touch 75,000 units.
The effort in the paper will be to analyze the impact of the following factors on the pricing strategy for Item345:
a) Lowering of costs for Item 345
b) Impact on profit if price is lowered for Item 345
c) Effect of the pricing strategy on competition and market share
d) Calculation of contribution margins for the pricing options
QUESTIONS
1. Should Lille Tissages lower the price to FF15? (Assume no intermediate prices are being considered.)
Answer: In order to understand the pricing decision we need to understand the contribution margin of Item345 at FF20 and at a lower price FF15. Please refer to Exhibit-2, which shows the per unit contribution margin at the price FF20 as 13.2 (volume is 75,000 units), whereas if the price is FF15 then the contribution margin is equal to 8.51 (volume at 175,000 units).
The above per unit information shows that keeping the price at FF20 will
MIDTERM PAPER
EXECUTIVE SUMMARY 3
QUESTIONS 4
CONCLUSION 8
EXHIBIT-1 9
EXHIBIT -2 10
EXECUTIVE SUMMARY
Lille Tissages is located in Lille, France and it is the largest textile company in the region. The department whose financial management is under scrutiny in this case study sells only Item 345. The price for Item 345 was raised from FF15 to FF20 in 2002, which resulted in decrease in market share of Lille Tissages for item 345.
The company is facing stiff competition and the management of the department is forced to rethink its pricing strategy for Item345. The sales director proposed that if the department decides to reduce the price of Item345 to 15 French francs, the company would be able to increase the market share to 25% from the current 20%. The market volume is expected to grow from 625,000 units to 700,000 units; this would mean the sales for 2004 would be 175,000 units.
If the company was to keep the price at 20 French francs, which is the current price, the sales would only be able to touch 75,000 units.
The effort in the paper will be to analyze the impact of the following factors on the pricing strategy for Item345:
a) Lowering of costs for Item 345
b) Impact on profit if price is lowered for Item 345
c) Effect of the pricing strategy on competition and market share
d) Calculation of contribution margins for the pricing options
QUESTIONS
1. Should Lille Tissages lower the price to FF15? (Assume no intermediate prices are being considered.)
Answer: In order to understand the pricing decision we need to understand the contribution margin of Item345 at FF20 and at a lower price FF15. Please refer to Exhibit-2, which shows the per unit contribution margin at the price FF20 as 13.2 (volume is 75,000 units), whereas if the price is FF15 then the contribution margin is equal to 8.51 (volume at 175,000 units).
The above per unit information shows that keeping the price at FF20 will