beauregard-textile-company

1. 1. ShouldBeauregard Textile Company announceaprice of $3.00 or
$4.00 peryardfor Triaxx-30?
2. What are the financial results for Beauregard Textile Company that
Beal andCalloway shouldbe lookingat with respect to the present
pricing arrangement?
3. How wouldthe numberslook if Beauregard droppedits price to
$3.00?
4. Calhounand Pritchardpresumably is showinga loss at $3.00. Why
then is it not raising its price? What happenstoCalhounand
Pritchardif Beauregard dropsits price to $3.00?
ProblemIdentification
Beauregard is a textile company with annualsales of about$82 millionmakingit one of the largest firms
in its segment. Currently, due to recent increase in coststhe price of Triaxx-30, a fabric manufacturedby
BTC, hasbeen increased from $3 to$4. The current suppliermarket for Triaxx-30 (T30) is a duopoly with
Calhoun& PritchardInc. as the only other supplier.
Since C & P have retained their price of $3 BTC haslost its marketshare. The current problem faced by
the BTC executives is whether to reduce the price back to $3 so as to regain marketor to remain at $4 in
order to maintainprofits.
SituationAnalysis
Traditionally BTC ownedclose to56% of the market share for Triaxx-30, while C & P owned 44% of it. Due
to the increase in costsincurred by BTC they were forced toincrease their price from $3 to $4. The
customersbeing price sensitiveimmediately shifted towardsC & P which resulted in loss of market share
for BTC. Now BTC has33% of the market share while C & P has66%.
C & P generally waits for BTC to announcetheir price list before publishingtheir ownprice list so as to
remain at par with the competition. But when BTC increased their price C&P refused tofollow suit and
maintainedtheir price level. Since the marketis inherently price sensitiveit is estimatedthat the market
size will shrink by 20% if both suppliersincrease their price levels.
Analysisof alternatives
The 3 available alternatives are

2. 1. MaintainStatusQuo, ie, BTC prices at $4 while C & P prices at $3. Inthis scenario C & P enjoysmajor
marketshare while not makinggoodprofit marginswhere as BTC while losingtheir marketshare they are
able to cover their costs andclaim profits throughhigherprice. This also doesn’tresult in shrinkageof the
marketsize
2. BTC reduces its price to $3. Inthis scenario BTC will mostly regain their marketshare butmay notbe
able to cover their costs throughtheprice. There is noloss of marketsize in this scenario.
3. C & P raises their price to$4. This will result in marketshrinkageby 20% . Bothplayers will enjoy
greater profit marginsin this scenario. But bothplayers raisingtheir prices simultaneously may be
regarded as collusionand deemed illegal.
CostAnalysis
The relevant costs tobe consideredwhile calculating the contributionto profitsof T-30 are
• Direct Labor
• Material.
• Material Spoilage.
• Direct Department Expense
Expenses thatare notrelated tothe scale of productionof T-30 can be excluded. Also the expenses that
have been allocated to cover costswhich are commontoother items can be excluded.
Following 1stAlternative
FromExhibit 2 we find that at productionlevel of 75,000 unitstherelevant costsfor BTC are:-
Direct Labour$0.80
Material $0.40
Material Spoilage $0.04
Direct Dept Exp $0.12
Total Relevant cost$1.36
Price $4
Contribution$2.64
Total contribution= 75000*2.64=$198,000
For C & P correspondingproduction=150,000
Direct Labour$0.74

3. Material $0.40
Material Spoilage $0.038
Direct Dept Exp $0.1
Total Relevant cost$1.278
Price $3
Contribution$1.722
Total Contribution$258,300
Following 2ndAlternative
FromExhibit 2 we find that at productionlevel of 125,000 unitstherelevantcosts for BTC are:-
Direct Labour$0.76
Material $0.40
Material Spoilage $0.038
Direct Dept Exp $0.1
Total Relevant cost$1.298
Price $3
Contribution$1.70
Total contribution= 125000*1.70=$212,750
For C & P correspondingproduction=100,000
Direct Labour$0.78
Material $0.40
Material Spoilage $0.040
Direct Dept Exp $0.112
Total Relevant cost$1.332
Price $3
Contribution$1.67
Total Contribution$166,800

4. Following 3rdAlternative
Due to 20% shrinkageof marketsize the productionlevel of BTC will be 100,000. Correspondingrelevant
costsfor BTC are:-
Direct Labour$0.780
Material $0.40
Material Spoilage $0.04
Direct Dept Exp $0.112
Total Relevant cost$1.332
Price $4
Contribution$2.67
Total contribution= 100,000*2.67=$266,800
C & P correspondingproduction=80,000
Direct Labour$0.8
Material $0.40
Material Spoilage $0.040
Direct Dept Exp $0.112
Total Relevant cost$1.352
Price $4
Contribution$2.648
Total Contribution80,000*2.648=211,840
Conclusion
Fromthe analysiswe find that the combinedprofit of the firms is maximumwhen bothfirms gofor a
price of $4. This may be regarded as collusion because the firms are required to set their prices
independently anda simultaneousrise in prices may lead to legal action.
Moreover, we see thatC&P obtainsmaximumprofits when it lists a price of $3 andBTC prices at $4.
Hence it is highly unlikely that C&P increase their price to $4. So, in-orderto increase the overall
contributionBTC shouldreduce their price to $3.