Week 5 – Assignment
Price Quotes and Pricing Decisions Applied Problems
Please complete the following two applied problems:
Problem 1:
Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company,
with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of nontoxic,
all-natural products they’d like to use and get them in a bundle. Families can choose all kinds of
products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of
expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta.
Assume their primary goal of business is to maximize economic profits, although they want to do
business honestly.
Show all your calculations and process. Describe your answer for each question in three- to fivecomplete
sentences.
a. You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration
price, and advise them whether they should charge a skimming price or a penetration price, with
supportive reasoning for and against each pricing alternative.
b. Are they likely to make economic profits initially? Can they continue to make economic profits in the
long term? Why or why not? Discuss.
c. What advice would you give to Alba and Gavigan to help them make more profit in the long term?
Problem 2:
You operate your own small building company and have decided to bid on a government contract to
build a pedestrian walkway in a national park during the coming winter. The walkway is to be of
standard government design and should involve no unexpected costs. Your present capacity utilization
rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your
incremental costs to be $268,000 and your fully allocated costs to be $440,000. Your usual practice is
to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and
other factors. You expect three other firms to also bid on this contract, and you have assembled the
following competitor intelligence about those companies.
Issue Rival A Rival B Rival C
Capacity
Utilization
At full
capacity
Moderate Very low
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Goodwill
Considerations
Very
concerned
Moderately
concerned
Not
concerned
Production
Facilities
Small and
inefficient
plant
Medium
sized and
efficient
plant
Large and
very
efficient
plant
Previous
Bidding
Pattern
Incremental
cost plus
35-50%
Full cost
plus 8-12%
Full cost
plus
10-15%
Cost Structure
Incremental
costs
exceed
yours by
about 10%
Similar cost
structure to
yours
Incremental
costs 20%
lower but
full costs
are similar
to yours
Aesthetic
Factors
Does not
like winter
jobs or dirty
jobs
Does not
like messy
or
inconvenient
jobs
Likes
projects
where it
can show
its creativity
Political
Factors
Decision
maker is a
relative of
the buyer
Decision
maker is
seeking a
new job
Decision
maker is
looking for
a
promotion
Show all of your calculations and processes. Describe your answers in three- to five-complete
sentences.
a. What price would you bid if you must win the project?
b. What price would you bid if you want to maximize the expected value of the contribution from this
contract?
c. Defend your answers with discussion, making any assumptions you feel are reasonable and/or are
supported by the information provided.
Carefully review the Grading Rubric (http://ashford.waypointoutcomes.com/assessment/3740/preview)
for the criteria that will be used to evaluate your assignment.
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