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pay on open account, but all had excellent credit standings and records. Budget
implication: The costs of providing this level of service were forecast to be £24,000 per
annum or £2000 per month.
Pricing
The strategic direction of the company is not to price aggressively. There are no monopoly
considerations; Value Added Tax has to be charged on such a product. The image of the
product is one that is associated with a premium price.
* Currently the price elasticity in the market is 3 and the product is priced retail at £0.32,
and costs £0.18 to produce - the variable costs of production.
* Total fixed costs are £1.2 million. The weighted average retail price of yoghourt products
is £0.29.
* Current sales value of £42 million at £0.32 retail (or 131.25 million units) = £0.278 net of
VAT sales tax = £0.2224 into store.
* Gross margin £0.0424 x 131.25 million units = £5.56 million by value.
Budget implication:
* Raising price by £0.01 = 3 per cent increase in relative price = 9 per cent volume drop =
119.43 million units in volume x £0.0524 gross margin = £6.25 million. Raising price by
£0.02 = 6.25 per cent increase in relative price = 19 per cent drop in volume = 106.31
million units in volume x £0.0624 gross margin = £6.61 million.
* Raising price by £0.03 = 9.5 per cent increase in relative price = 28.5 per cent drop in
volume = 80.7 million units in volume x £0.0724 gross margin = £5.84 million by value.
Profit improvement suggests that increasing the price by £0.01 would lead to a 12.5 per
cent improvement in profitability. Unit price to be £0.2324.
Promotion
The advertising budget is to be set to maximize the level of response based on previous
research, which suggests that the threshold for achieving the maximum propensity to
purchase is 3, and the advertising decay rate is 30 per cent per month. It has been
estimated that achieving an effective response in the market will increase sales by around
10 per cent - this has been defined by research as the potential advertising elasticity.
Because of the message effectiveness and cost considerations, the entire budget is to be
spent on television (Table 14.F).
Table 14 F. Frequency distribution for Under 12 viewers - TVR equals expenditure of
£1000 in value.
TVR
Cover
1
2
3
4
5
6
50
50
20
15
8
-
-
100
70
45
35
17
7
3
150
82
65
55
25
15
8
200
85
75
65
38
27
14
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