PRICING EXERCISES 1

Question 1: LED Luminaries

A company that makes LED luminaries (used in offices) sells its product at Rs.100 per unit. The
product’s variable cost is Rs.60 and the total fixed cost is Rs.10,000. The company now wants to
reduce the unit price to Rs.90. It also wants to advertise the special price in newspaper at a cost
of Rs.5000. A new packaging to promote the product costs Rs. 5 more than the regular
packaging. The company wants to earn a profit of Rs.6000. How many units are to be sold to
achieve this objective?

Question 2: LCV Pricing

A leading LCV (Light Commercial Vehicle) manufacturer is known for introducing novel models
every year. There are some consumers who eagerly look forward to their new models. Their
demand structure is as follows:
Price Quantity
450000 95000
500000 85000
550000 75000
600000 65000
650000 60000
700000 58000
750000 56000
800000 54000
850000 52000
900000 50000

a. What is the ideal price?

b. The variable cost of the LCV is Rs.225000. Does your answer to (a) change? Why?

c. A market research agency has reported to you that among these consumers, those who
are willing to pay Rs.650000 or more do so purely for the novelty attached to owning the
new model before many others do so. You can call them “Innovators”. The others can be
called “Followers”. The followers wait for price reduction up to their reservation prices.
Does this knowledge change your answer to (b) change? Why?

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All the exercises are prepared by Dr. R C Natarajan, Professor, T.A.Pai Management Institute(TAPMI), Manipal
2011. Revised by Dr.Gururaj Kidiyoor, Professor TAPMI, 2019

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Question 3: Wheeler Feed Mills
Wheeler Feed Mills Ltd. has a production capacity of 10 MT (Metric Tonnes) per hour. The
cattlefeed is packed in 50 kg jute gunny bags. During the last three years, the company had seen
a growth as follows:
Year Sales in MT % over Prev.Yr
2014-15 26208 18%
2015-16 32236 23%
2016-17 39972 24%

The company operates three shifts a day on all days except Sundays which is earmarked for
weekly maintenance. The product’s price is Rs.1.25 per kg including GST of Rs 0.12 (fixed
irrespective of price). There are no middlemen in the distribution of the product.
The cost of feed per kilo is as follows (in rupees):
Raw Materials 0.50
Contract Labor 0.05
Electricity 0.05
Administrative overheads 0.15
GST 0.12
Plant depreciation 0.15
Freight 0.05
The department of animal husbandry in the state has sent an urgent enquiry seeking whether
the company will be able to supply them on a one-time-purchase basis a quantity of 2000 MT of
feed. They had indicated an all-inclusive price of one rupee per kilo.

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Question 4: Training Programme Pricing
Shiv Kapoor, a consultant and a known trainer in sales and marketing area is planning a training
programme in Mumbai. The programmes consists of two themes such as Sales and Key Account
Management on the one side and Branding and Marketing on the other. Each programme will
be of 1-day duration and is targeted at middle/senior managers from the corporate. The fees
are fixed for the two concerts and here is where Shiv Kapoor is in a dilemma. He has not been
able to decide as to whether he should have separate fee for the two programs or a combined
fee for both the programs. 2 He is also looking at the possibility of issuing “single” 3 fee as well as
combined fee. Shiv Kapoor has identified four distinct types of potential audience who are Sales
Managers, Brand managers, Marketing Managers and Key Account Managers. It has been
estimated that these four groups are equally divided in number. The four types of audience
have been learnt to display a willingness to pay (Rs. 000) for the concerts as follows:

Concert types and willingness to pay in Rs’000

Segment Sales/ Key Account Branding / Marketing
Management
Sales Managers 45,000 5,000
Brand Managers 20,000 40,000
Marketing Managers 5,000 45,000
Key Account Managers 40,000 20,000

Shiv Kapoor is thinking on the following pricing potions -

1. Individual pricing of the programs at prices
a. Rs.5K,
b. Rs. 20K,
c. Rs.40K
d. Rs.45K
2. Bundling both Programs at Rs.50K or Rs.60K
3. A bundle price of Rs. 60K and also offering the programs individually at Rs. 45K each

What is your suggestion to Shiv Kapoor for his pricing strategy? You may assume that each
segment has 25 potential members.

2
One thing he is certain about is that he will NOT segregate Sales from Key Account management, and similarly
Marketing from Branding. So, these “pairs” will stay.
3
“Single” fee is for either of the two programs. Thus, a single fee can be for Sales and Key Account management
and another single fee can be for Marketing and Branding. These are NOT interchangeable and cannot be used for
the other program.

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Question 5: Albatross Airlines

Albatross Airlines, who has a monopoly operation between the two cities Panacea and
Medicure since January 1, 2018, makes one round every day. It sells tickets only two-way and
hence every passenger who flies one way returns by Albatross as well. AA owns an aircraft that
is a 90-seater. The demand for this sector for such two-way tickets [thanks to competition due
to availability of good road transport between the two cities] varies according to price, and is
found as follows:
Price $ Passengers
20 120
40 80
60 40

Every day whenever AA operates the flight, it incurs a fixed overhead of $2000. The cost of
ticketing, processing, checking-in and in-flight food & beverages is $10 per passenger. AA had
spent $1,75,000 at the start of its operations in this sector towards aspects such as Market
Research and advertising etc. This is an essential expenditure to be incurred by any aspirant in
this sector. The company was willing to recover this over two years.
(a) What price should AA fix and why?
(b) Armstrong Hospitals at Panacea operates a training college at Medicure and desires to
enter into a contract with AA for 16 seats everyday to be earmarked exclusively for
them, whether or not they actually utilize them. They have quoted a rate of $ 1,16,800
per year and said if AA could accept this they would sign a contract immediately. Should
AA accept this rate? Justify your answer.
(c) On January 25, 2019, AA heard that Seagull Airlines, a small airliner operating in another
such small sector, was planning to make an entry into this sector and was preparing to
undertake a market research study in this area. Their CEO was heard on the TV saying,
“This sector is attractive as we expect to recover our costs in about a year.” A friend of
yours who met this CEO in a party learnt from his Financial Advisor that Seagull will not
enter the market if the recovery period exceeds 15 months. If you are the CEO of AA,
what will be your strategy?