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that the average discount would only be 3 per cent across the current distribution system.
Salesforce commission rates had however remained static over the past 5 years,
averaging 2.5 per cent, and this would also be true of the likely Iceberg sales commission.
Physical distribution costs were based on the current use of third party road haulage
companies, which quoted a flat rate of £0.80 delivery charge per unit. Company analysis
suggested that the use of three delivery vehicles would cost around £100,000 for the next
year, and both current and new products could be handled by the same delivery system.
Warehousing policy would not need to change with the introduction of the new product
range and total warehousing costs would be around £800,000 for the next year.
The marketing team was less sure however about inventory policy. They felt that the
current levels of inventory were too high. Given that the economic order quantity for both
products was 150, safety stock levels of 10,000 were too high. With internal financing
costs at 20 per cent; overall finance costs were therefore substantial at those stock levels.
In the current year, the company had not needed to invest in sales promotional activity,
and this was likely to be the case in the next year, though contingency plans existed for a
concentrated sales promotion campaign in late spring, should sales not come up to
expectation. The budget set aside for this was £200,000. Salesforce structures would not
change with the introduction of the new Iceberg range. The company would continue to
employ five sales representatives, divided geographically. Costs for the current year were
£300,000; historically salesforce costs had increased by inflation plus 3 per cent, and
pricing would be based on this figure.
Order processing costs for the Clearwater lines were around £10,000. It was unlikely that
these costs would increase with the introduction of the Iceberg range as new technology
introduced during the last 3 years steadily decreased order processing costs. Variable
production costs had shown the tendency to rise slowly over the last few years, though the
overall rate had been slightly less than the underlying rate of national inflation. The 5 year
raw material and component costs trends for Clearwater had been as follows: £1.6, 1.7,
1.9, 2.0, 2.0. Other variable costs had slightly declined as the company was able to
manufacture products more cost effectively over time. It was anticipated that the variable
costs for the Iceberg would be around £4.5. It was anticipated that once 100,000 units had
been manufactured the cost would have declined to £4.0 with each additional 100,000
units lowering variable costs by £0.10.
The fixed cost environment for the entire consumer water treatment products
manufactured by Watatreat had fallen over the last 3 years. The company had followed the
policy of introducing flexible manufacturing systems which had reduced the overall space
that the production line occupied. Fixed costs had declined over the last 2 years from
£70,000 to £60,000.
Pricing objectives
Watatreat had for many years followed strategic objectives of margin maximisation. It also
had a policy of attempting to achieve break even on new product developments within 3
years, based on a finance charge of 15 per cent on development costs.
Action
What pricing policy should you follow?
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