1. The retailer ValueX is considering a 33 % drop in the price it charges for its blenders. Each blender is currently priced at $54. The retailer pays $29 per blender from the manufacturer.
(a) What is the initial contribution margin for ValueX?
(b) What is the break-even change in sales of the blenders that must be achieved for the drop in price of the blenders to improve ValueX's profit?
(c) Suppose instead a pricing expert suggests that the price of the blenders be increased to $59. What is the break-even change in sales of the blenders that would leave the retailer in a more profitable position?
(d) Suppose ValueX knows that the elasticity of demand at its current price point of $54 is 50%. Which strategy (the 33% drop or increase to $59) should ValueX adopt?
2. Genetics Inc. creates products that improve the process of genetic testing. D-Test is one of Genetics Inc.'s products. To improve its profit, Genetics Inc. wants to learn what D-Test is really worth to customers. Researchers in the field of genetic testing consider the product G-Sync as the best alternative to D-Test. G-Sync sells for $200 per test kit. In comparing D-Test to G-Sync, Genetics Inc. discovered the following four drivers of differentiation (positive and negative) between the two products:
(a) Higher Value per Test for Customers: D-Test provides a higher quality DNA structure than GSync. The DNA structures are used by pharmaceutical companies who are its customers to manufacture commercial drugs. In general, the pharmaceutical companies expect to earn lifetime revenue of $40,000 for a drug. The lifetime cost of marketing and promoting a typical drug is about $30,000. It usually takes 500 tests in a year using G-Sync's test kit to develop a successful drug. On the other hand, it takes only 300 tests in a year using D-Test's test kit. [Hint: The value of using the test kits for the customer comes from the profit they make from selling the
drugs]
(b) Labor Cost Saving: D-Test's test kit also produces more efficient laboratory staff work. Customers save 5 hours of processing labor compared to using G-Sync. Laboratory personnel receive an average of $20 per hour.
(c) Saving from Lower Failure rate: The analysis of the DNA sample by the laboratories usually involves a critical stage where the DNA may degrade and 3 weeks of research time may be lost since the work has to be repeated. G-Sync's product leads to such DNA degradation 15% of the time while D-Test's superior product leads to DNA degradation only 10% of the time. Laboratory
personnel work only 5 days a week for 10 hours a day.
(d) Higher Shipping Cost: Genetics Inc. is located in Switzerland whereas G-Sync's parent company is located in USA and is closer to the US pharmaceutical customers. As a result, customers have to pay higher shipping costs to obtain D-Test, about $30 per test kit, whereas G-Sync is delivered to customers at a shipping charge of $10 per test kit. Calculate the total economic value of the D-Test test kit.