Video Case 13: Washburn Guitars: Demand, Pricing, and Costing
Question 1
For a first-time buyer of the guitars, similar to many other products, the price will play a crucial role in determining the demand. Economic theory project that when the price is high, the demands tends to be low (Barnes, 2008). However, it is worth noting that price is relative to the level of income. If for example, the guitar cost $ 500; to a person earning $ 100,000, this would not be an expensive item. On the other hand, to a person earning $ 10,000, the guitar’s price is relatively high. Second, in the music age of the current century, age will undeniably play an indispensable role in influencing the guitar’s demand. Youths are likely to demand the guitar at a higher rate compared to the older generation who in most cases have lost touch/taste in music. Third, consumer taste and preferences coupled with the company’s brand equity would also serve as a determinant of the demand of the guitar lines.
For a sophisticated musician who wants a signature model, the price would prove a relatively irrelevant factor in determining the level of demand, contrary to a first-time buyer. The brand equity of the product would take a crucial position in influencing demand. If a famous musician is associated with the guitar, the guitar’s demand is likely to be high. Second, the quality of the guitar would also play a significant role in influencing demand. It is worth noting that quality of the product influences the brand equity of the product. Third, the prestige of the musician coupled with his/her tastes and preferences would also influence demand. Other factors would include workmanship, age, and level of income not to forget to mention the musician’s guitar’s design and craftsmanship which also plays a role in determining the guitar’s quality.
Question 2
Shifting and movement along a demand curve
Various factor handles the shifting in the demand curve to the right (for a higher price). Such factors include, but not limited to, increase in the consumers’ disposable income, increase in demand caused by an unfavorable change in the price of the guitars’ substitutes such as pianos. A favorable change in the consumers’ tastes and preferences coupled with an increase in the brand equity resulting in an increase in demand would also result in a shift in demand curve to the right. Examples of pricing strategies that would result in a movement along the demand curve would include cost-plus pricing and psychological pricing. While the former sets prices based on the predetermined costs and profits, the latter sets the price on the based on the emotional responses of the consumers. If for instance, a sophisticated musician is happy with the sound quality of the guitar lines, he would be willing (not reluctant) to pay a higher price. In such a case, Washburn would increase its prices resulting in a movement along the demand curve.
Question 3: Break-even analysis
Break-even point = fixed cost X sales
Contribution per unit
Contribution = selling price per unit – variable cost per unit
In Washburn’s case
Variable cost per unit = $ 25 + ($ 15 X 8) = $ 145
Fixed costs = $ 14,000 + $ 4,000 + $ 20,000 = $ 38,000
The break-even point for the different retail prices are as analyzed in the table below
(b). Profits when the company sells 2,000 units @ $ 349
Total contribution = contribution per unit X total units
= 2,000 X $ 204 = $ 408,000
Profit = total contribution – fixed cost
= $ 408,000 – 38,000
= $ 370,000
Question 4: Break-even point after decrease in costs
After the merger;
Rent and taxes will reduce by 40% to result in rent and taxes of (0.6 X $ 14,000) = $ 8,400
Hours needed for each unit will reduce by 15% to result in hours per unit of (0.85 X 15) =12.75 hours.
Other factors will remain constant
As such;
‘New’ fixed cost = $ 8,400 + $ 4,000 + $ 20,000 = $ 32,400
‘New’ variable cost per unit = $ 25 + (12.75 X 8) = $ 127
The new break-even point for a retail price of $ 349.
In this case contribution per unit = $ 349 - $ 127 = $ 222
Break-even point (units) = Fixed cost = $ 32,400 = 145.9 units (146 units)
Contribution per unit $ 222
When the firm sells 2,000 units in this case
Total contribution = $ 222 X 2,000 = $ 444,000
Profit = $ 444,000 - $ 32,400 = $ 411,600
Question 5
Possible changes in costs as a result of relocation
In determining the costs that would either increase or decrease; we can take several assumptions. Material costs may reduce if the material price becomes cheaper in Asia. Consequently, the total variable costs would decrease. Besides, direct labor costs would decrease should the pay rate in Asia be lower than the current rate. Similarly, the total variable cost would decrease. The cost of management and quality control program might also reduce owing to a cheaper and efficient quality control programs in Asia. The firm would also incur additional costs by moving its operations in Asia such as shipping costs and transportation costs. The shipping costs would also come in with other related costs such as shipping insurance costs.
Reference
Barnes. D. (2008). Operations Management: An International Perspective. Thompsons
