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Part One
Case Study One

The Challenge

How do we maximize profitability, enjoy increased contribution margin while securing 50% to 70% of TRex business? How should we trade sales volume vs. sales discount?

The Information

• Our MVD division sells a product (Product MF) where we have a 90% world market share and capacity to supply the world 150% of current demand.
• The manufacturing unit is 60% utilized.
• There exists one customer, TRex, representing about 10% of the world demand where MVD share is 50% with a competitor which we shall name, JPS. TRex has made it known that their purchasing strategy is to keep two suppliers and that neither supplier will get more than 70% of the share at their account.
• Past performance has indicated that both suppliers have enjoyed about 50% share over the last two purchasing iterations and industry information has determined that JPS has made a commitment to expand capacity in 2014.
• Price of the product in question is $21.45/lb with raw material costs of $6.44/lb.
• Additionally there is another product that is sold to this customer where the Contribution margin is 55% at a selling price of $25.00/lb and the market share is also about 50%.
• It is assumed that for both products that the current MVD price is about 4% higher than the current competitive offer.


1. Does it make sense to discount the product sales to get increased share?

2. If so at what level of discounting does the discount detract from earnings?

3. Does it make sense to increase price knowing that no supplier will have less than 30% share?

4. At what price level does raising price make sense assuming that 30% share is the new state?

5. What is anticipated to be the competitor response of each option?

6. If the customer’s purchasing strategy changes to allow 100% (single sourcing) answer questions 1 to 5. How do your answers change?

Part Two
Case Study Two

The challenge

The Board of Directors of your organization will attend a Board Planning retreat at a “spa-resort” in two weeks. During this planning session board will focus on strategic initiatives for 2009.
You have been asked to prepare a detailed topical outline and facilitate their discussion during the budget planning session.

The information

• You have been asked to study the congressional testimony of Michael Masters very carefully before preparing your outline.
• Your organization is directly impact by commodity prices and in particular by crude oil and gasoline prices.
• You must also consider the global and national economic events during the last two quarters of 2008
• Since your feedstock costs (variable cost) has been volatile the contribution margin on similar sales contract has been changing drastically from first to second half of 2008. Many profitable contracts now were a losing proposition few months ago.


1. Based on your review of the congressional testimony of Michael Masters, what is the best way to budget for our feed stock needs?

2. Should we use our free cash flow and get involved with speculation on commodity prices?

3. What is your forecast for crude oil prices by the end of second quarter of 2009?

4. To what degree activities by index speculators during the first half of 2008 have contributed to the current financial situation?

Part Three

Please answer the following questions:

1. What have learned in this class? Please briefly describe the concepts that you have learned which can help you apply economic analysis to business decisions.
2. What did you learn from our guest speaker about continuous auditing? How will you apply your learning to your present or future professional opportunities?
3. What was the most important concept that you have learned in this class and why?

  • economics - ,

    I'm guessing that you tried to cut-and-paste the "information". As you found out, such efforts do not work well on the jiskha site.

    That said, always always always maximize profit where marginal cost = marginal revenue.

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