Pricing case Times have been rough at ShtinkerToy, Inc Yesterday was the first anniversary of its la


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Pricing case

Times have been rough at ShtinkerToy, Inc Yesterday was the
first anniversary

of its launch of its newest toy, “Thing-a-ma-bobber”
It has been selling well,

as predicted, but at a net loss, which was not predicted As
the newly hired

vp of sales for ShtinkerToy, you were just emailed that you
need to have a brief

report (no more than three typed pages) on the desk of Jack
Schlemiel, the

ceo, in two hours Jack asked you to prepare an emergency
detailed report on

current and future pricing strategies, and whether last
year’s loss implies that

the Thing-a-ma-bobber line should be shut down

Thing-a-ma-bobber is a set of blocks and connectors from
which kids can

build all sorts of fun stuff It is a unique building toy
that combines engineering

skills and a sense of aesthetics Currently, the
Thing-a-ma-bobber is sold in a

kit, where a kit consists of one block and one connector
Children often want

to buy multiple kits as the pieces from the various kits can
be combined Each

kit is sold at a price of $313

Bartholomew J Simpson, your Thing-a-ma-bobber sales
manager, collected

all the relevant data as follows: Last year, the company
sold nearly 180,000 kits

at the $313 price The children who buy the kits are
typically in first grade

Research suggests that boys and girls have different
individual demands: The

demand of each potential boy buyer is given by xb =
20−4p and the demand of

each potential girl buyer is given by xg = 12−3p
There are an estimated 10,000

boys who are potentially interested in the Thing-a-ma-bobber
and 40,000 girls

who are potentially interested Research also suggests that
this demand will

be stable on a yearly basis (new cohorts of first-graders),
and that the patent

ShtinkerToy has on Thing-a-ma-bobber will prevent entry into
this special niche

The costs of producing 1,000 units of Thing-a-ma-bobber were
calculated only

yesterday by the cost-accounting division and are summarized
in Table 1 The

cost data indeed indicate that, at $313 per kit, there is
considerable loss from

continuing operations

An additional fact about ShtinkerToy is that has a 5% cost
of capital

In conversations with Mr Simpson, a long-time veteran of
ShtinkerToy, you

hear a number of pieces of gossip For instance, the
previous vp of Sales was

Jim Schlemiel, Jack’s son (Jim has since been kicked
upstairs) Consequently,

the current pricing of $313 per kit is a sensitive matter
as it was Jim who set


Table 1: Estimated Costs for 1000 units of Thing-a-ma-bobber
(using last years

rounded to 180,000 units)

Item Cost

Direct Labor(a) $800

Administrative Labor(b) $880

General Administrative(c) $150

Raw Materials $700

Direct Utilities $500

Depreciation of Equipment(d) $100

Periodic Maintenancee $160

Total Costs $3,290

Unit Costs $329

(a)Direct labor: 5 people working together to produce 100

per hour at an hourly wage (including benefits) of $16/hr

(b)The annual total of salaries paid non-production labor

and administration, including benefits) involved in the

oversight of production and sales of Thing-a-ma-bob is

This is divided by 180 because yearly sales were 180,000

(c)$27,000 of the general administrative costs (eg, the

salary) of ShtinkerToys has been allocated to the

toy line

(d)Calculated using a 30-year straight-line depreciation

Because of periodic maintenance, the equipment has retained

original value of $540,000 and can be sold for that amount

the Thing-a-ma-bob toy line be discontinued

(e)The machinery needs inspection, cleaning and preventive

every 6 months Each of these inspections employs 8

for 60 hours each at $30 and hour (including benefits)


A) Mr Simpson suggests that you would be wise to include a
discussion in

your report about what is the right price to charge if
Thing-a-ma-bobber is sold

solely in kits “It would help your career here if you
could show that the boss’s [125 points]

son wasn’t a total screw-up,” remarks Mr Simpson
Include a discussion in about what is the right price to charge if
Thing-a-ma-bobber is sold solely in kits “

B) Mr Simpson also tells you that Hermione Granger, the vp
of Marketing, has

been arguing for selling pink kits and blue kits, arguing
that these can be priced

separately because no boy will buy pink and no girl will buy
blue “Hermione

is a real witch, plus which she’s the boss’s niece, so you
better analyze her

suggestion in your report,” notes Mr Simpson
“Both she and Jack will expect [180 points]

to see projections based on such a pricing scheme“

In conversations with others, you learn that there is strong
evidence that the

markets for boys and girls cannot be segmented because
today’s kids no longer

exhibit stereotypical color preferences After reviewing the
evidence yourself,

you are convinced of its validity Question – Can the pink
kits and blue kits can be sold separately, (ie be priced separately because
no boy will buy pink and no girl will buy blue?

C) In the email from Jack Schlemiel, he notes that Mr
Dufour, the vp of Engineering,

is pushing the idea of no longer selling individual kits,
but selling

only pre-packaged boxes with six connectors and six blocks
in each box (ie,

the equivalent of six kits) and price the boxes at $18 each
Mr Simpson tells

you, “the boss thinks the world of Dufour, so he’s not
going to buy any recommendation

you make if you haven’t compared it to Dufour’s”
Please compare your recommendations to Dufor’s

D) Write a report for the ceo that is responsive to Mr
Simpson’s advice and is responsive to Mr Schlemiel’s request Mr Schlemiel’s
email says there’s a $90,000 bonus if you come up with a pricing scheme better
than those of his son and Mr Dufour

E) There’s an additional $60,000 bonus if you can find the
optimal scheme (recalling that modern children do not have stereotypical color