Beauregard Textile Company
Problem Identification
Beauregard is a textile company with annual sales of about $82 million making it one of the largest firms in its segment. Currently, due to recent increase in costs the price of Triaxx-30, a fabric manufactured by BTC, has been increased from $3 to $4. The current supplier market for Triaxx-30 (T30) is a duopoly with Calhoun & Pritchard Inc. as the only other supplier.
Since C & P have retained their price of $3 BTC has lost its market share. The current problem faced by the BTC executives is whether to reduce the price back to $3 so as to regain market or to remain at $4 in order to maintain profits.
Situation Analysis
Traditionally BTC owned close to 56% of the market share for Triaxx-30, while C & P owned 44% of it. Due to the increase in costs incurred by BTC they were forced to increase their price from $3 to $4. The customers being price sensitive immediately shifted towards C & P which resulted in loss of market share for BTC. Now BTC has 33% of the market share while C & P has 66%.
C & P generally waits for BTC to announce their price list before publishing their own price list so as to remain at par with the competition. But when BTC increased their price C&P refused to follow suit and maintained their price level. Since the market is inherently price sensitive it is estimated that the market size will shrink by 20% if both suppliers increase their price levels.
Analysis of alternatives
The 3 available alternatives are
1. Maintain Status Quo, ie, BTC prices at $4 while C & P prices at $3. In this scenario C & P enjoys major market share while not making good profit margins where as BTC while losing their market share they are able to cover their costs and claim profits through higher price. This also doesn’t result in shrinkage of the market size
2. BTC reduces its price to $3. In this scenario BTC will mostly regain their market share but may not be able to cover their costs through the price. There is no loss of market size in this scenario.
3. C & P raises their price to $4. This will result in market shrinkage by 20% . Both players will enjoy greater profit margins in this scenario. But both players raising their prices simultaneously may be regarded as collusion and deemed illegal.
Cost Analysis
The relevant costs to be considered while calculating the contribution to profits of T-30 are
Direct Labor
Material.
Material Spoilage.
Direct Department Expense
Expenses