5-535,420
11,835.6-1,197.6
Breakeven in systems (units)
B/E Units (year one) = 799 units
Fixed Cost ($500,000) / System Contribution = 2.44
2) $1,499 for the blower and $20 for the blanket
This is a variable pricing strategy as it considers the costs incurred in the production and distribution of the Bair Hugger Patient Warming System
First year contribution
Heater/Blower Contribution (2,112,091) +
Blanket Contribution (x1000) (28,180)=
System Contribution
Price (discounted) - Direct Costs
1,478,463.7-535,420
Breakeven in systems (units)
B/E Units (year one) = 439 units
Fixed Cost ($500,000) / System Contribution = 0.52
3) $3,995 for the blower and $22 for the blanket
This a skimming pricing strategy as it implements a significantly higher price than the competition.
First year contribution
Heater/Blower Contribution (5,628,955) +
Blanket Contribution (x1000) (28,180)=
System Contribution
Price (discounted) - Direct Costs
3,940,268.5-535,420
Breakeven in systems (units)
B/E Units (year one) = 138 units
Fixed Cost ($500,000) / System Contribution = 0.14
5. Recommended Strategy
The first strategy aims to attract as many customers as possible by providing the product at a lower price than the competition. The third strategy is just the opposite of the first one in the meaning that it implements high retail price, with the aim of ensuring quick revenues. Aside these obvious benefits, each of the two alternatives presents limitations. The penetration pricing strategy stands the risks of generating large amounts of sales at an unsustainable retail price. On the other hand, the skimming pricing...
They are both designed to serve specific purposes, but in the long run, they are not viable and must be replaced with a more stable pricing strategy. This is generally the variable pricing strategy, in which the retail price is set based on the costs incurred in the manufacturing and distribution of the respective item. This is the most stable approach to setting the price mostly since changes only occur when the costs incurred become modified. Therefore, Augustine Medical should implement the second alternative, with the retail price of the blower of $1,499 and a unit price of $20 per blanket.
6. Conclusions
Augustine Medical was founded in Minnesota by a former surgeon with the specified aim of improving the methods of treating post operatory hypothermia. The product created is called Bair Hugger Patient Warming System and it combines various benefits of other competitive products, while also reducing some of their limitations. It is composed of two complementary parts: a heat blower and a blanket.
The current problem faced by the company refers to setting the proper retail price for the new product. Three alternative solutions are available. The first one is a penetration pricing strategy that promotes the system at a low $1,007; the second is a variable pricing strategy with a system price of $1,519 and the third is a skimming pricing strategy, with a retail price of $4,017 per system. The second alternative seems the most viable one.
References
Augustine Medical Inc., the Bair Hugger Patient Warming System, Case
2009, Breakeven Analysis, Dinky Town, http://www.dinkytown.net/java/BreakEven.htmllast accessed on February 3, 2009
