Beauregard Textile Company
In a desire to increase the company’s working capital for the company’s future financial investment in a plant modernization and expansion program, Beauregard Textile Company increased the price of its Triaxx-30 product to bring its profit margins up to that of their other products. In a sequential-move game theory Calhoun & Pritchard, Beauregard’s primary rival, did not raise its price even though its costs were assumed to be similar. As a result, Beauregard’s unit sales dropped significantly as their customers purchased the cheaper competitor’s product, causing Beauregard’s profit contribution to decrease. A closer examination of Beauregard’s cost analysis revealed that it includes fixed costs, which when …show more content…
Total Relevant Variable Cost 1.360 1.298 1.332
Contribution Margin per Yard 2.640 1.702 2.668
Sales Volume 75,000 125,000 100,000
Total Contribution $198000.00 $212750.00 $266800.00
When the expenses not related to the sale of T-30 are excluded and our cost analysis shows a more desirable result and again, shows there is no need to raise the price above $3 per yard unless Beauregard was able to convince Calhoun and Pritchard to follow suit, which so far has been unsuccessful by increasing their sales figures and profit margins by the price conscious consumers switching to a comparable product.
Calhoun and Pritchard presumably are showing a loss of $3.00. Why then is it not raising its price?
Assuming a similar cost structure to Beauregard, Calhoun and Pritchard are most profitable when undercutting Beauregard’s higher pricing by the increased volume of T-30 sold. It is in Calhoun and Pritchard’s best interest for Beauregard to continue selling T-30 at $4 per yard. When we look only using the variable cost associated with the production of T-30, as suggested in Exhibit 4, Calhoun and Pritchard are able to sustain a $3 per yard price without any additional line by line cost cutting analysis so long as Beauregard continues to charges $4 per yard. Additionally, it is unlikely that Calhoun and Pritchard are using the same accounting