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The president of houston electronics was pleased with the company's new product the HE Versatile CVD. The product is portable and can be attached to a computer tp play or record computer programs or sound, attached to an amplifier to play or record music, or attached to a TV to play or record TV programs. IT can even be attached to a camcorder to record videos directly on compact disks rather than on tape. It also can be used with a headset to play or record sound. The proud president announced that this unique an innovative product would be an important factor in reestablishing the North American consumer electronic industry.

Based on development costs and prediction os sales volume, manufacturing cost, and distribution cost, the cost-based price of the HE Versatile CVD was determined to be $425. Following a market skimming strategy, management set the initial selling price at $525. The marketing plan was to reduce the selling price by $50 during each of the first two years of the product's life to obtain the highest contribution possible from each market segment.

The initial sales of the HE Versatile CVD were strong, and Houston Electronic found itself adding second and third production shifts. Although these shifts were expensive, at a selling price of $525, the product had ample contribution margin to remain highly profitable. The president was talking with the company's major investor about the desirability of obtaining financing for a major plant expansion when the bad news arrived. A foreign company had announced that it would shortly introduce a similar product that would incorporate new design features and sell for only $350. The president was shocked.

Required:

How could the foreign competitors profitably sell a similar product for less than manufacturing costs to Houston Electronic? What advice do you have for the president concerning the HE Versatile CVD? What advice would you have to help the company avoid similar problems in future?

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