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Cumberland Metal Industries Engineered Products Division--1980 Case Solution

Solution Id Length Case Author Case Publisher
1219 1263 Words (5 Pages) Jeffrey J. Sherman Harvard Business School : 580104
This solution includes: A Word File A Word File

The case study is based on a new product launch by a company manufacturing curved metals. In this case, the product has a high market potential because it is a highly improved version of the products already existing in the market. However, the main concern for the managers is the pricing of the product. The pricing has three alternatives; it can be priced based on a margin above the cost, it can be set according to the competitor products, or it could be based on the customer's perceived value. In this case, the customer's perceived value is the saving that they have. The recommendation is to base the price lower than the value of the product, but higher than the manufacturing cost in order to gain customer satisfaction.

Following questions are answered in this case study solution

  1. What’s your price for the curled metal pads? Why?

  2. How much do you think one of these pads is worth to a customer? What do the test data tell you about that?

  3. How big is this market? What kind of opportunity is this? Does your price affect how much of the market you will get? How big the market is?

  4. Is it more important to make high profits or to build market share?

  5. How are you going to market these pads? What is your marketing program going to look like?

Case Analysis for Cumberland Metal Industries Engineered Products Division--1980 Case Solution

1. What’s your price for the curled metal pads? Why?

The CMI’s pricing has three alternatives; one is the cost-based pricing in which the price is decided based on a fixed margin above the costs of the product. The second is the comparative pricing in which CMI can keep its price equivalent to Asbestos. The third alternative is to base the pricing on the customer's perceived value.

Cost-based Pricing

The company wanted revenue of a 45% margin on the product. The total manufacturing cost of 250 cushion pads per month comes up to $69.18. At a 45% margin, this price would be $100.311. The retailer margin is 30%, making the price $130.4.

Comparative Pricing

Based on the $40 cost for a pack of 12 pads of Asbestos, the price of one comes to $3.33. If the Colerick test is considered, the price is $2.08. If the company wants to price it at the same point as Asbestos, it would have to market its value-added benefits that Asbestos does not have.

Customer Perceived Value

The total value saved by the customer by calculations of the tests shows that the worth is $834 approximately saved for one.

Therefore, the pricing should be based at a level lower than the customer perceived value. This is also a marketing strategy to deliver more value at a lower cost to gain customer satisfaction. This would mean pricing above the manufacturing cost level of $69.18 which is the total manufacturing cost for an 11.5 inches pad. The recommended pricing is $700, lower than the customer perceived value and higher than the manufacturing costs.

2. How much do you think one of these pads is worth to a customer?  What do the test data tell you about that?

The customer perceived value can be found out using the Colerick and Fazio tests.

Colerick Tests(300 piles x 50 ft. = 15000 total ft. driven)

Asbestos

CMI

Feet Driven Per Hour while pile driver was at work

150

200

Piles driven per set of pads

15

300

Number of pads per set

24

6

Number of sets required

20

1

Number of set changes

20

1

Time required for change per set

20 minutes

4 minutes

Colerick costs per set

$50

Not charged

Cost Per pad

(50 / 24)= 2.08

 

Time to drive pile

(15000/150)=100 hours

(15000/200)=75 hours

Time used to change sets

(20x20) = 400 min.

(4x1) = 4 min.

Total time used

6400 minutes

4504 minutes

Hours saved: 6400 - 4504 = 1896 minutes = 31.6 hours

Labor overhead rate = $21 + $10 + $13 + $100 = $144

Saved per hour: $144 X 31.6 hours = $4550.40

Saved per pad CMI = $4550.40 / 6 = $758.40

Fazio Tests (300 piles x 40 ft. = 12000 total ft. driven)

Asbestos

CMI

Feet Driven Per Hour while pile driver was at work

160

200

Piles driven per set of pads

6

300

Number of pads per set

12

5

Number of sets required

50

1

Number of set changes

50

1

Time required for change per set

20 minutes

4 minutes

Fazio costs per set

$40

Not charged

Cost Per pad

(40 / 12) = $3.33

Not charged

Time to drive pile

(12000/160)=75 hours

(12000/200)=60 hours

Time used to change sets

(50x20) = 1000 min.

(4x1) = 4 min.

Total time used

5500 minutes

3604 minutes

Hours saved: 6400 - 4504 = 1896 minutes = 31.6 hours

Labor overhead rate = $21 + $10 + $13 + $100 = $144

Saved per hour: $144 X 31.6 hours = $4550.40

Saved per pad CMI = $4550.40 / 5  = $910.08

Average of the two numbers of per unit saved gives the value to the customers

($758.40 + $910.08) / 2

The average price saving and value to the customer is $834.24.

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