MM-7 - maintain or increase profitability, the price...

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Concepts of Marketing Name: JOMC 475 MM-7 Marketing by the Numbers – Chapter 9 When introducing new products, some manufacturers use a price skimming strategy by setting a high initial price and then reducing price later. However, reducing price also reduces contribution margins, which in turn impacts profitability. To be profitable, the reduced price must sufficiently increase sales. For example, a company with a contribution margin of 30 percent on sales of $60 million realizes a total contribution to fixed costs and profits of $18 million ($60 million x 0.30 = $18 million). If this company decreases price, the contribution margin will also decrease. So to
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Unformatted text preview: maintain or increase profitability, the price reduction must increase sales considerably. 1. Refer to Appendix 3, Marketing by the Numbers, and calculate the new contribution margin for the company discussed above if it reduces price by 10 percent. Assume that unit variable costs are $70 and the original price was $100. 2. What total sales must the company capture at the new price to maintain the same level of total contribution (that is, total contribution = $18 million)?...
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This note was uploaded on 01/18/2012 for the course JOMC 475 taught by Professor Heidihennink-kaminski during the Spring '11 term at UNC.

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