A Jeans company has been manufacturing and selling a branded jeans 'TOUGH' over the past several years. The company has always faced tough competition from the rival firms in the business, but the company has faced the competition successfully. The secret of its success has been its ability to innovate new designs of branded jeans, some imitated some original. Nevertheless, it finds carrying on business this way and making profit to be a tough proposition because other firms follow suit quickly with new designs. The company has planned to enter the new millennium with new and more attractive branded jeans. It has decided to give the brand name 'SNOB' to its new model. The model is intended to cater for the demand of upper class consumers.
On a preliminary assessment of the cost and price conditions, the company finds that:
The production cost of the new brand is expected to be much higher than that of TOUGH. Therefore the cost function of TOUGH is not relevant for SNOB.
Since the cost of production is expected to be significantly higher, the price of SNOB has to be correspondingly higher than for TOUGH. Therefore the demand function for the new brand is bound to be a different one.
The Company uses its in-house resources to find the cost and demand functions for its new brand SNOB. The research conducted by the production department estimates the cost function as TC = 1000 + 100Q + 2Q2. The market research department conducts a market survey and estimates the demand function to be Q = 200 - 0.25P.
The company supplies this information to you and seeks your opinion on the following aspects of its decision making.
Given the cost and demand function for the new product SNOB, will the introduction of the new product be profitable independent of TOUGH?
If it is profitable, then what is the profitable range for the production of Jeans? This information is required for chalking out an appropriate strategy in face of the competition.
What is the level of output that will maximize the profit from the production and sale of SNOB? What is this maximized profit?
What are the key drivers/determinants of the profitability from the sale of SNOB?