Question

1. XCELL Printing has created a new cartridge for 3D printers that they claim is far superior to the closest alternative cartridge sold by MM Printing. XCELL is in the process of selecting a price for the cartridge and wants to learn what the cartridge will be really worth to customers who are manufacturing firms. The MM cartridge sells for $200. While the MM cartridge breaks down with a probability of 40% after every 500 print jobs on a 3D Printer, the XCELL cartridge breaks down with a probability of 30% after every 900 print jobs. Every fix in case of a breakdown requires an hour of labor cost and also a material cost of $5. The XCELL cartridge requires a higher quality plastic compared to the MM cartridge. Suppose you are told that the cost of plastic amounts to $10 per carton for XCELL and $8 per carton for MM, and typically a customer would need to reorder a carton every 450 print jobs. Also, you are told that $20 is the hourly rate for labor hired by the typical manufacturing firm. Also, on the average, a manufacturing firm does 4500 print jobs in a year. Suppose the lifetime of a cartridge is 1 year. Calculate the total economic value of the XCELL cartridge.

2. Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from the manufacturer.

(a) What is the initial contribution margin?

(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in sales required to maintain its profitability?

(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability?

(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve for the retailer.

(e) Suppose the retailer’s market research team determines that the elasticity of demand for consumers of blenders is – 1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves.

(f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $54?

Answer 1

Solution:

Price of MM cartridge = $200

Probabiility of break down of MM cartridge = 40% after 500 print jobs

Average print for a manufacturing firm = 4500 print job

Expected breakdown for MM cartiridge = 4500/500*40% = 3.60

Cost of fixing breakdown for MM cartridge = Material cost + labor cost = ($5*3.60) + (3.60 * 1*20) = $90

Probability of breakdown for Xcell cartridge = 30% after every 900 print job

Expected breakdown for Xcell cartridge = 4500/900*30% = 1.50

Cost of fixing breakdown of Xcell Cartridge = (5*1.50) + (1.5*1*20) = $37.50

Required cost of carton for MM Cartrdige = 4500/450*8 = $80

Required cost of carton for Xcell Cartridge = 4500/450*10 = $100

Total economic value of MM cartridge = $200 + $90 + $80 = $370

Total economic value of Xcell Cartridge = $200 + $37.50 + $100 = $337.50