Price & Marketing Math Case Essay

Marketing & Graphics Communications Department
Eibling Hall 401

Washburn International: Guitars and Break-Even

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Washburn International began manufacturing guitars 1883 in Chicago, Illinois at its original location on Maxwell Street. Eventually, Washburn and the Maxwell Street location would emerge as the epicenter of a musical movement. In later years, Washburn opened another manufacturing facility in Nashville, the home of country music, in order to capitalize on booming guitar sales in the south. The history of Washburn Guitars is the history of a wide range of musicians.

From blues players who shaped rock ‘n roll to multi-platinum recording artists to emerging guitar virtuosos. It is a history that can be heard and experienced every time you turn on the radio or listen to a live performance. It is a history built by skilled craftsmen and musicians who share one common love–a passion for the guitar.

Washburn’s 125 year history is steeped in the tradition of fine instrument making. The products reflect the hard-working spirit of the Washburn employees who craft and design each guitar.

Washburn continues to be a consistent leader in combining design, innovation, and technology to deliver the rich, bold sounds for a vast musical landscape. Washburn guitars are preferred for many first time buyers and professional musicians as well. Prices, designs, and quality of various guitars manufactured by Washburn are formulated to attract market segments that include the first time guitar buyer as well as professional musicians. The company is also well known for its custom made guitars purchased by major recording artists. Washburn may produce “signature model guitars” signed by Darryl Jones or Joe Perry, but it still has to set prices that enable it to stay in business.

The current executive vice president of Washburn International is responsible for setting the prices for the company’s line of guitars. Currently, a new line of guitars is being considered for production with a suggested competitive retail price of $850. Suggested retail prices of $900 and $1000 are also being considered for the new guitar line. Washburn distributes it guitars at major musical retail outlets like Sam Ash. Market research has indicated that Washburn can expect to sell as many as 25,000 of the new line of guitars internationally. In addition, the vice president is trying to decide whether it would be more cost effective and profitable to manufacture the new guitar line in the Chicago plant or in the Nashville facility. The Nashville facility enjoys some lower fixed costs because of lower rental costs, taxes, etc. To help in the decision making, the company accountant has provided the current relevant information. Chicago Facility:

Retail Markup %
50%
Total Fixed Costs
$360,000
Labor Costs Per Hour
$15
Number of hours required for new unit
8 hrs.
Additional Materials cost per unit
$150

Nashville Facility:
Retail Markup %
50%
Total Fixed Costs
$250,000
Labor Costs Per Hour
$10
Number of hours required for new unit
8 hrs.
Additional Materials cost per unit
$150

Marketing Principles – MKTG 111
Price & Marketing Math Case: Answer Sheet
Marketing & Graphics Communications Department
Eibling Hall 401

Questions:
1. What factors are most likely to affect demand for the lines of Washburn guitars (a) bought by first-time guitar buyers and (b) by a sophisticated musician who wants a signature model? 2. For Washburn, what are some factors that may cause the demand curve for the new guitar line to shift (movement of the demand curve)?

3. In Washburn’s Chicago plant, what is the break-even point in units and Sales (BEP) for the new line of guitars if the suggested retail price is (a) $850,
(b) $900,
(c) $1000

Show your work. Hint: Calculate Washburn’s selling price to retailers first. ————————————————————————

4. If Washburn achieves the sales target of 25,000 units at $850 suggested retail price, what will its profit be?

Show your work. Hint: Calculate Washburn’s selling price to retailers first. (Profit = Total Revenue – Total Costs) ———————————————————————— 5. Assume that Washburn moves its production to Nashville and that the costs are reduced as projected in the case. Given a $850 suggested retail price, what will be the new (a) BEP in units

(b) BEP in Dollars
———————————————————————— 6. Assume that Washburn negotiates a new retail markup of 35%, with a suggested retail selling price of $850, (a) what is Washburn’s new selling price per guitar to retailers (b) what is Washburn’s new BEP in units, and

(c) what is Washburn’s new BEP in dollars?
New Selling Price $________
Chicago
Nashville
BEP in Units

BEP in dollars

7. If for competitive reasons, Washburn eventually has to move all its production to China, (a) which specific costs might be lowered and (b) what additional costs might it expect to incur? To answer this question, visit the following website:

http://globaledge.msu.edu/ Click on Country Insights and find China.

8. The Washburn buyers have managed to negotiate a price of 685.46 CHINA RENMINBI (CNY). What does this convert to in U.S. dollars? HINT: Use the following link or another currency converter to find the answer: http://www.bloomberg.com/invest/calculators/currency.html

9. With all of the options given in this case, which retail pricing strategy would you choose and why? In addition, which U.S. manufacturing facility would you choose? _

______________________________________________________
Helpful Equations:

•To Find Manufacturers selling price to retailers given MU%:

(100% – MU%) X Retail Selling Price

•Break Even Point: in Units & Dollars

BEP in units = Fixed Cost__________ Unit Selling Price – Unit Variable Cost

BEP in dollars = BEP in units x SP (Selling Price)

•Profit Equation:
Profit = Total Revenue – Total Cost
= (Unit Price x Quantity Sold) – Total Cost
= (P x Q) – [ FC + (UVC x Q)]

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