Marketing Principles Mktg 1110 Quantitative Analysis Decisio

Marketing Principles Mktg 1110quantitative Analysis Decision Makin

Washburn International's history and current operations, including production facilities and market focus, set the context for analyzing demand factors, cost structures, and strategic decisions related to their new guitar line. The company is considering pricing strategies, manufacturing locations, and potential market shifts. The key decision involves evaluating costs, sales targets, and demand factors to optimize profitability and market positioning.

Given this scenario, the primary objectives are to analyze demand influences, determine break-even points at different pricing levels, assess profit projections, and recommend strategic production and pricing options based on cost structures and market conditions. An understanding of how demand curves shift, cost behaviors, and competitive dynamics is essential to making informed decisions that maximize profitability and market share for Washburn's new guitar line.

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Introduction

Washburn International's long-standing history and evolving market strategies underscore the importance of detailed financial and demand analysis in launching a new product line. With a 125-year legacy rooted in craftsmanship and innovation, Washburn aims to expand its market share through a new guitar line, considering various pricing and manufacturing options. The decision-making process involves understanding demand factors, cost structures, and strategic market positioning to ensure profitability and competitive advantage.

Demand Factors Influencing Purchase Decisions

Demand for Washburn's guitars varies substantially based on the target market segment. For first-time guitar buyers, demand factors primarily include price sensitivity, brand recognition, affordability, and perceived quality. Price elasticity plays a crucial role, as new entrants are often more price-sensitive; hence, competitive pricing and promotional strategies significantly influence their purchasing behavior. Additionally, marketing efforts, peer influence, and access to introductory educational resources impact demand among this segment.

In contrast, sophisticated musicians seeking signature models or professional-grade instruments prioritize quality, brand reputation, customization options, and endorsements by notable artists. Their demand is less price-sensitive and more influenced by the guitar’s sound quality, prestige, and the artist's signature appeal. Their purchasing decisions also depend on the tone, durability, and unique features of the instrument, which justify higher prices and foster brand loyalty.

Market Dynamics and Demand Curve Shifters

Several factors can cause the demand curve for Washburn’s new guitar line to shift. Technological advancements in guitar manufacturing can increase demand if new designs or features enhance playability and sound quality. Changes in consumer preferences, driven by trends in music genres or cultural shifts, can also shift demand upward or downward. Economic factors such as disposable income levels and unemployment rates influence overall demand; higher disposable income typically boosts demand for premium instruments.

Market competition plays a pivotal role; the entry of competing brands with innovative features or lower prices can shift demand downward for Washburn’s offerings. Additionally, promotional campaigns, endorsements by famous artists, and positive word-of-mouth can shift demand upward. External factors, including tariffs, trade policies, and technological disruptions, likewise impact demand by affecting costs and consumer purchasing power.

Break-Even Analysis for Washburn’s Chicago Facility

To calculate the break-even point (BEP) in units, we use the formula:

BEP in units = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)

First, we determine the selling price to retailers:

  • Retail markup = 50%
  • Retail Price = $850, $900, $1000
  • Cost to retailer = Retail Price / (1 + Markup%)

Calculations:

  • For $850 retail price: Cost to retailer = $850 / 1.5 = $566.67
  • For $900 retail price: Cost to retailer = $900 / 1.5 = $600
  • For $1000 retail price: Cost to retailer = $1000 / 1.5 = $666.67

Variable cost per unit includes materials and labor: $150 + (8 hours x $15/hour) = $150 + $120 = $270

Fixed costs = $360,000

Calculations for break-even units:

  • (a) At $850 retail price: $566.67 - $270 = $296.67 contribution margin per unit
  • Units BEP = $360,000 / $296.67 ≈ 1212 units
  • (b) At $900 retail price: $600 - $270 = $330 contribution margin
  • Units BEP = $360,000 / $330 ≈ 1091 units
  • (c) At $1000 retail price: $666.67 - $270 ≈ $396.67 contribution margin
  • Units BEP = $360,000 / $396.67 ≈ 907 units

Profit Analysis at Target Sales Volume

Assuming a sale of 25,000 guitars at \( \$850 \) retail price, the company’s revenue and profit are calculated as follows:

  • Selling price to retailer: $566.67
  • Total revenue: 25,000 x $850 = $21,250,000
  • Total cost: Fixed costs + variable costs per unit x units sold
  • Variable costs: 25,000 x $270 = $6,750,000
  • Total costs: $360,000 + $6,750,000 = $7,110,000
  • Profit: $21,250,000 - $7,110,000 = $14,140,000

Hence, with sales at this volume and price, Washburn would experience substantial profit margins.

Manufacturing Shift to Nashville and Cost Implications

If production shifts to Nashville with lower fixed costs, the new fixed costs reduce to $250,000, with other costs remaining constant. The new BEP calculations at an $850 retail price are:

  • Contribution margin (from previous calculations): $566.67 - $270 = $296.67
  • BEP in units: $250,000 / $296.67 ≈ 843 units
  • BEP in dollars: 843 x $850 = approx. $716,550

This reduction in fixed costs lowers the breakeven volume, improving profitability and operational efficiency.

Impact of Retail Markup Negotiation

With a reduced markup of 35%, the new selling price to retailers is calculated as:

New Retailer Price = Retail Price x (1 - Markup %)

For $850 retail price:

  • New selling price = $850 x (1 - 0.35) = $552.50

Thus, the new manufacturer’s selling price (cost to retailers):

  • $552.50 / 1.35 ≈ $409.26

Recalculating the BEP:

  • Contribution margin: $409.26 - $270 = $139.26
  • BEP in units: $360,000 / $139.26 ≈ 2584 units
  • BEP in dollars: 2584 x $850 ≈ $2,197,400

Implications of Moving Production to China

Lower labor and manufacturing costs are typical in China, including cheaper labor (~$5/hour), reduced material costs, and economies of scale. However, additional costs such as logistics, tariffs, quality control, intellectual property concerns, and adaptation to different regulatory environments must be considered. Increased lead times and potential quality variability are risks that can impact overall profitability.

Strategic Recommendations and Conclusions

Given the analysis, transitioning production to Nashville or China presents different advantages. Nashville offers reduced fixed costs and maintains domestic manufacturing, which benefits quality control, brand perception, and supply chain agility. Moving to China could further lower costs but introduces risks related to quality, intellectual property, and delays.

Pricing strategies should balance competitive positioning with profit margins. A retail markup around 50% appears optimal to sustain profitability, but negotiations indicating flexibility can influence the break-even point favorably. Market segmentation should focus on younger, emerging musicians and professional artists, considering demographic, geographic, psychographic, and behavioral factors. The most promising target is the professional musician segment, which values quality and brand prestige.

Overall, Washburn should prioritize maintaining high quality and strong branding, leverage Nashville’s cost advantages for scalability, and explore strategic partnerships in China cautiously. These approaches, supported by market research and cost analysis, position the company for sustainable growth.

References

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  • Kotler, P., & Keller, K. L. (2016). Marketing Management. Pearson.
  • Lee, S. M., & Carter, H. (2018). Global supply chains and manufacturing strategies. International Journal of Production Economics, 199, 213-223.
  • Porter, M. E. (1985). Competitive Advantage. Free Press.
  • Song, S., & Kimin, K. (2021). Effects of tariffs and trade policies on manufacturing costs. Supply Chain Management Review, 15(1), 33-41.
  • Technavio. (2022). Global Guitar Market Analysis & Trends. Retrieved from https://www.technavio.com
  • World Trade Organization. (2023). Country Insights on China. WTO Publications.

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