1. Factors likely to affect the demand for the line of Washburn guitars
Various factors tend to influence the demand for any product. However, the factor in play may depend on the kind of customer for the product and the nature of the product (Boundless n.p). If the product is to be sold to the first time buyer, the demand- determinant factors may be different for a customer demanding for a unique product. The common factors likely to affect the demand for Washburn guitars when bought by first-time buyers include prices of the guitars and the income of the buyers. The buyers will consider the prices offered for the guitars by Washburn manufacturers and compare them with the prices of other companies before making the purchasing decisions. Buyers will also consider their incomes because the income of the buyer determines his or her ability to buy. For sophisticated musicians, the demand for guitar will be affected by the price, income, and taste of the musicians. Additionally, the quality and the design of the guitar will be considered by sophisticated musicians when making the buying decisions. Since the company hires experienced craftsmen in designing high-quality guitars and setting competitive prices (Washburn International n.p), the demand for its guitars is likely to be very high both from the first buyers and sophisticated musicians.
2. Factors that may cause the shift of Washburn’s demand curve
Various factors cause the movement of the demand curve either to the right or the left. The price of the product is one of the factors that may cause the shift of the Washburn’s demand curve. If the company decides to increase the prices of the guitars, few buyers will afford them. As such, the demand will fall, resulting in a downward shift. However, if the company set affordable prices for the guitars, many buyers will afford its product and will be attracted by fair prices. As a result, the demand curve will move outwards.
Consumer tastes is another factor that leads to the shift of the demand curve. The trend in buyers’ tastes for the guitars will significantly determine the direction to which the demand curve for Washburn will shift. Since many buyers prefer the Washburn's guitars, the demand curve is likely to shift outwards. The market size represents another fundamental determinant of shifts in demand curves. The market size is measured in terms of company’s customer base. Changes in customer base are often caused by population changes (Boundless Para 4). Since the company is expanding its market, the customer base will increase, resulting in the outwards shift in its demand curve. Additionally, the level of employment can significantly affect the direction of the shift in the demand curves. Areas with high rates of employment tend to have a large number of people with high disposable incomes. As such, the demand for products tends to be very high. Since Washburn situates its market in areas with high population of employed people like Chicago, the demand for its guitars is likely to shift to the right.
3. The break-even points in units and sales for the new line of guitars in Chicago’s plant
Considering the information provided for the Chicago facility, the BEP (break-even point) in both units and sales will be calculated as follows
Labor cost = labor cost per hour × the number of hours required to make a new unit. Thus, total labor cost= $ 15 ×8= 120. Therefore, the variable cost of one unit is given by
Total variable cost of one unit= 120+150= 270. Since the markup is given as 50%, the selling prices will be given by 50% × 850=$ 425, 50%×900=$450, and 50%×1000=$ 500
The total cost= total fixed cost + total variable cost
If we let the total produced units to be x, the total variable cost will be 270x. Therefore, the total cost will be 270x + 360000. Since the break -even point is defined when the total revenue equate with total expenses (Powers 38),
Total sales = selling price per unit × the units sold. Thus,
Sales= 425x
Therefore, BEP if the suggested retail price is $ 850 will be given as 270x+36000=425x. This implies that
360000=155x. Therefore, x=360000/155= 2322. This means that the company will break even if it sells 2,322 guitars. If the suggested retail price is $ 900, the BEP will be 360000/180= 2000 units, while the BEP in units when the suggested retail price is 1000 will be 360000/230= 1565 units. The BEP in sales considering different retail prices will be given by
850 × 2,322=$1,973,700
900× 2000= $1,800,000
1000×1565= $1565000
4. The profit value if the company achieves the sales target of 25000 units at $ 850 suggested retail price
The selling price to retailers will be 0.5× 850= $ 425.
The total cost= 360000+ (270× 25000) = $ 7,110,000
The total revenue generated from the sale of 25000 units is 850×25000= $ 21,250,000
Profit= total revenue –total cost. Thus, profit will be 21,250,000-7,110,000= $ 14,140,000
5. New BEP in units and Dollar if the company moves its production to Nashville given $ 850 as the suggested retail price
The unit variable cost = 150+ (10×8) = $ 230. If we let the total units produced to be x, the total variable cost will be 230x. Therefore, the total cost will be
230x + 250000. Given that the markup is 50%, the selling price of one unit will be given by (100%-50%) × 850= $425. Therefore, the total revenue will be 425x. Since the break- even point occurs when the total cost equates to total revenue,
230x + 250000= 425x. This implies that x=250000/195= 1282. Therefore, the company will break even if it sells 2173 guitars. Since the unit price is $ 425, the break- even sales revenue will be 425× 1282= $ 544850
6. New BEP in units and dollars as a result of changes in markup to 35%
Retail selling price = (100%-35%) ×850= $552.5
BEP in Dollars = unit price × total units
BEP in units= Total fixed cost/ (unit selling price – unit variable cost)
Chicago= 360000/155= 2322
Nashville = 250000/195= 1282
7. Specific cost that Washburn is likely to lower and additional costs it might incur if it moves all its production to China
If the company eventually moves its production to China, the labor costs are likely to reduce since the cost of labor will be denominated in Yuan, which is weaker than the US Dollar. Additionally, the material costs are likely to reduce due to high material supply in the Chinese market (China n.p). However, the transport cost will increase since the company will have to transport the product to its home market.
8. Executive summary
Every business organization is concerned with the environmental factors that surround its operations. The main environmental factors that would be of great interest to Washburn include its geographical location and the climate of its location. These two factors are vital considerations since they affect the market and marketing activities of the company. The market for the company’s product mainly consists of musicians and guitarist. Therefore, weather is an important environmental factor that can significantly affect its operations. The company uses two manufacturing facilities each with different production volume. I would recommend the Nashville facility because it requires fewer units to break even. Additionally, both fixed and variable costs for this facility are lower compared to the Chicago plant. For example, the total fixed cost for Nashville is $ 250000 while that of Chicago plan is $ 360000. The costing strategy that I would recommend is the market penetration pricing because it is flexible and promotes the competitiveness of a business. I would choose the Nashville facility because it is able to offer more competitive prices due to its efficiency in production. The target market for the new product line will be the US since it has large population of about 318 million people, accessible through different means, and it has many people with music aspirations which will favor my business. Additionally, the people of US have good consumption habits and therefore, the new product is likely to do well in the US market. Since the company is able to break even at low production volume, it should continue with production. It should establish more production facility in other segments of the market with potential to have a large customer base.
Works Cited
Boundless. Changes in demand and shifts in the demand curve. Boundless, 26 May 2016. Web. 29 July 2016. <https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introducing-supply-and-demand-3/demand-46/changes-in-demand-and-shifts-in-the-demand-curve-173-12271/>.
“China - market overview china - market overview.” n.d. Web. 29 July 2016. <https://www.export.gov/apex/article2?id=China-Market-Overview>.
Powers, Thomas. "Breakeven analysis with semifixed costs." Industrial Marketing Management 16.1 (1987): 35-41.
Washburn International: Guitars and Break-Even (case note) . Web. 29 July 2016. <http://www.washburn.com/>
