Question 1. lISten, elasticity is important,” said the director of the aquarium, “but we borrowed $21.6 million (for 20 years, other fixed costs are $10,000 per month; total fixed costs per month are $100,000) to build the aquarium last year. We need to set a price of $16 to be able to pay our debt since variable costs are four dollars per person, and we use a standard markup of 300% of variable costs (current price is $12). I’ve already reduced my promotion budget to pay the debt. If last month’s attendance is any indication (only 10,000 customers), we will have to raise prices and maybe eliminate promotion. We can estimate elasticity when the debt is paid, although I don’t think it is important since we are the only aquarium within 150 miles. Furthermore, there are 4,000,000 people in the metropolitan area. If 50% of them visited the aquarium once (at $16 per person), we could pay off our debt immediately.”
Do you agree or disagree with the director’s approach? Explain.
Note: The aquarium is open 30 days per month, eight hours per day. Do not limit your answer to price alone.
</pclass=”msonormal”>Question 2. A company’s marketing strategy can be customer-oriented (i.e., strategy designed by examining primarily customer needs) or competitor-oriented (i.e., strategy based on competitors’ actions). In reality, companies do both. For the following scenarios, identify which strategies to emphasize and why.
A market leader in pharmaceuticals
A market follower in a mature market
A market nicher (i.e., company focused on a small segment) in interior decoration of luxury homes
A a market challenger in a mature market with low margins and significant economies of scale effect
Question 3. Gobi Inc. has sales of $40,000,000. The contribution margin is 40% and the fixed costs are $3,000,000. The variable cost per unit is $12. The company is considering two different strategies for increasing their profits:
Spend $2,000,000 in advertising; the results is expected to increase the company’s sales by 25%
Reduce the price by 20%; the price-demand elasticity is -3.0
Which of the two strategies will generate the highest overall profits? Show all calculations!