Pricing/Market Segmentation

SWING VERSUS STEADY

Both Swing Manufacturing and Steady Manufacturing operate in the widget industry, but with radically different cost structures. Swing is a capital-intensive, automated manufacturer, while Steady is a labor-intensive "job-shop." Monthly operating data are as follows:

Swing Manufacturing Steady Manufacturing
Sales 5,000 units 5,000 units
Price $10.00 $10.00
Variable $2.50 $5.50
Fixed Cost $35,000/month $20,000/month
Full Cost $9.50 $9.50
Current Profit $2,500/month $2,500/month

Swing and Steady both currently have equal (50%) market share. Each is evaluating opportunities to enhance profits. One opportunity involves selling to a low-value, but potentially high-volume, market segment not currently served by either company. The potential increase in sales for either company entering that market alone would be at least 40% (2000 units). If they both entered, the potential sales increase would be at least 20% for each of them. Unfortunately, reaching that market would require pricing at $8.50, 15% below current levels.

(a) If either company could costlessly segment the market for pricing (that is, charge the 15% lower price only to this new segment without undermining the prices charged to current customers), how much additional profitability could each company earn by achieving a 40% increase in sales? Would you recommend that either or both companies pursue this opportunity?

(b) In reality, neither Swing nor Steady can effectively segment this market (each must charge one price to everyone). Calculate the break-even sales changes for this opportunity for each company. Also, calculate the changes in profit for a 40% increase in sales. Briefly explain why this answer differs from your answer in part (a).

(c) Which competitor is better positioned to take advantage of this opportunity? Assuming that neither company can segment the market, what advice would you give to Swing and to Steady regarding this opportunity?

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