Case 1.
Lille Tissages, SA
Background
Early 1996, Lille Tissages, was the largest company in its segment of the French textile industry with FF 96 millions of sales of the “Item 345”product. The product is expensive but competitive.
In 1995, Lille Tissages increased their prices from FF 15 to FF 20 the meter to bring profit up to insure adequate funds will be available for the long-term company’s expansion program. Contrarily, the competitors held their prices for 95 & 96 for similar Item 345 at FF 15. As the competitors held low prices for the last two years, Lille Tissages lost a significant portion of its former market position.
Considering predictions, volumes and cost analysis made by the director’s board, the question is to know if Lille Tissages should lower their price to FF 15 and what could be the consequences of a such act.
Recommendations
In a long term vision, we think keeping the Price at 20 FF, is the only way to re-gain market shares, making profit and give confidence to the expansion program of the company.
1. Should Lille Tissages lower the price to FF 15 (assume no intermediate prices are being considered)?
The management faces the following problem. Either, the company sells “Item 345” at a FF 15 price or at a FF 20 price. According to the sales director, a fair forecast of industry volume for 1997 was 700,000 meters.
• By adopting the FF 15 price, the sales director was convinced that the company could sell 25% of the 1997 industry total.
That is 175,000 meters.
• By adopting the FF 20 price, the management was convinced that the sales of Item 345 would not fall below 75,000 meters.
Exhibit 1
According to exhibit 1, the estimated cost per meter of Item 345 :
- at 15 FF (175,000 volume of production) is FF 15.41.
- at 20 FF ( 75,000 volume of production) is FF 19.80.
As shown by exhibit 2, the estimates sales of item 345
- at a 175,000 volume of production is FF 2,625,000
- at a 75,000 volume of production is FF 1,485,000
,the estimated total cost of Item 345
- at a 175,000 volume of production is FF 2,696,750
- at a 75,000 volume of production is FF 1,485,000.
Exhibit 2
As result, by selling at FF 15 price the company will make a loss of FF 71,500, but if the company held the price to FF 20, the company will make a profit of FF 15,000.
Unfortunately, by keeping the price high, we expect the company to loose again a market portion. But as the long term strategy of the company is to make profit on Item 345 and as many consumers are convinced of the superiority of the product, we recommend to keep price at FF 20.
Lille Tissages S.A. should not lower the price to FF 15, otherwise the company will make a heavy loss of FF 71,750.
2. If the department that produces Item 345 was a profit centre and if you were the manager of that department, would it be your financial advantage to lower the price?
Definitely yes, the departemental profit will increase if we lower the price.
If we consider the departemental expenses ( Direct + Indirect Expenses ) of FF 2.21 per meter at FF15 we have a departmental cost of FF 386,750. (See exhibit 3).
This means that at FF15 we have a departemental profit of 2,238,250.
The same exercise done with a price of FF 20, shows a departemental profit of 1,115,000.
Exhibit 3
Definitely yes, to have a departemental financial advantage we