Affiliated Institution
A summary about the case study Setting Tuition and Financial Aid
“Analyzing Managerial Decisions: Setting Tuition and Financial Aid” starts on a very soft tone where the board of Ursinus College in Pennsylvania raises its tuition and school fees with over fifteen percent defying economic rules the college applications subsequently increase with two hundred above the normal applications. The reason why it defies the rules of economics is that people believe the more expensive a college is the better it is.
This incidence also happened to other colleges that raised their tuition fees in order to match their competition college, which with a raise in fees leads to a higher number of applications. Colleges that lowered their fees reduced their intake levels by at least 22% this led to a conclusion that said it didn’t work for them
Admissions director, Susan Hansen made the observation of the unique nature of college school demand curves. In that when colleges increase their tuition fees they get more applications than prior when college fee was lower. The demand curve slopes upwards. This leads her to recommending to the president of a liberal arts college in the East to increase tuition fee and reducing financial aid will help in solving the schools financial problem.. She argues that the above information is all data from competing colleges.
She says that eventually they will have a higher enrollment rate and of better and quality students.
The case study for Rich Manufacturing, answer questions1-5
- Why do many firms use cost-plus pricing for supply contracts?
It is the oldest pricing strategy that has been used since time immemorial because of its ease in calculation. It is a way of customer retention since it’s simply the cost of production with an additional mark up price that shall be deemed as profit in this case the client is made to feel like part of the company since even a raise or lowering of profits is easily and must be justified to the client. It encourages price stability if the competing firms take the same approach. It also makes pricing decisions easy thus can be made at a very junior level in any organization.
- What potential problems do you envision with cost plus pricing?
It is not efficient and does not produce incentives that drive to increasing profitability through cutting cost of production. This is because price differentiation is not practical. It encourages laxity at work since they have a guaranteed profit margin
.It discourages market research which is not only good for pricing strategies but also for marketing and production reasons. It ignores the concept of higher demand of a product should lead to higher selling prices.
This leads a business to a vicious cycle of production and existence since the cost is set and there is no room for expansion.
- Should Gina contest the price increase? Explain
No, since Gina is aware of how heavily unionized Bhagat is. This was actually agreed during a contract negotiation, if they negate it could lead to a strike. Furthermore salaries are amongst the issues considered during cost of production thus this justified the increment.
- Is the increase more likely to be justified in the short or in the long run? Explain
It is more justifiable in the short run since in the long run they decide to reduce the number of employees and have a small efficient group rather the large numbers they are used to.
- How will a $3 increase in the price machine parts affect Gina’s own production decisions
An increase in price of machine parts means an increase in the prices at Rich manufacturing company to cushion the extra charge.
References
Alchian A Armen, Demtez Harold, (1972), production, information cost and economic organization, Oxford University Press New York
