Question

Wendy Keating, marketing manager of consumer products for Wire Solutions, is trying to set a price for her most promising new product: a space-saving shoe rack suitable for small homes or apartments.

Wire Solutions—located in Ft. Worth, Texas—is a custom producer of industrial wire products. The company has a lot of experience bending wire into many shapes and also can chrome- or gold-plate finished products. The company was started 16 years ago and has slowly built its sales volume to $3.6 million a year. Just one year ago, Keating was appointed marketing manager of the consumer products division. It is her responsibility to develop this division as a producer and marketer of the company’s own branded products—as distinguished from custom orders, which the industrial division produces for others.

Keating has been working on a number of different product ideas for almost a year now and has developed several designs for DVD holders, racks for soft-drink cans, plate holders, doll stands, collapsible book ends, laptop stands, and other such products. Her most promising product is a shoe rack for crowded homes and apartments. The wire rack attaches to the inside of a closet door and holds eight pairs of shoes.

The shoe rack is very similar to one the industrial division produced for a number of years for another company. That company sold the shoe rack and hundreds of other related items out of its “products for organizing and storing” mail-order catalog. Managers at Wire Solutions were surprised by the high sales volume the catalog company achieved with the rack. In fact, that is what interested Wire Solutions in the consumer market and led to the development of the separate consumer products division.

Keating has sold hundreds of the shoe racks to various local hardware, grocery and general merchandise stores, and wholesalers on a trial basis, but each time she has negotiated a price—and no firm policy has been set. Now she must determine what price to set on the shoe rack, which she plans to push aggressively wherever she can. Actually, she hasn’t decided on exactly which channels of distribution to use. But trials in the local area have been encouraging, and as noted earlier, the experience in the industrial division suggests that there is a large market for this type of product. Further, she has noticed that a Walmart store in her local area is selling a similar rack made of plastic. When she talked casually about her product with the store manager, he suggested that she contact the chain’s houseware buyers in the home office in Arkansas.

The manufacturing cost of her rack—when made in reasonable quantities—is approximately $2.80 if it is painted black and $3.60 if it is chromed. Similar products have been selling at retail in the $9.95 to $19.95 range. The sales and administrative overhead to be charged to the division will amount to $95,000 a year. This will include Keating’s salary and some travel and office expenses. She expects that a number of other products will be developed in the near future. But for the coming year, she hopes the shoe rack will account for about half the consumer products division’s sales volume.

Evaluate Wendy Keating’s strategy planning so far. What should she do now? What price should she set for the shoe rack?

1. If wire solution took a 30% markup on the black shoe rack and a 35% markup on the chrome shoe rack what would the selling prices be for each? Is it correct with $3.64 and $4.86. respectively.

2. In this scenario, Wal-Mart elected to purchase the shoe racks and they took a 40% markup on each shoe rack what would final customers (Wal-Mart consumers) pay for each shoe rack?

3. Since they are just starting the consumer division, Wire Solutions may decide to focus on just the chrome shoe rack because it appears to be a better quality product. Let’s assume a variable cost of $2.20 per chrome rack, and taking the current 35% markup to calculate selling price outlined in question #1, how many chrome shoe racks would they need to sell to break even?

4. If wire solution wanted the chrome shoe rack to sell for $9.99 in retail stores, what should they sell it to retailers for assuming the retailers will take 45% markup? Calculate wire Solution markup percentage based this selling price.

Answer 1

1.

The variable cost for the racks are 2.8 and 3.6 respectively. If only this cost is considered and the markups of 30% and 35% are applied then the overall pricing of the product to the retailers will be

2.8*1.3 = 3.64

3.6*1.35 = 4.86

2.

If Walmart decides to add a 40% markup then the cost the final customers are

3.64*1.4 = 5.096

4.86*1.4 = 6,804

3.

Variable cost = 2.2

Selling price = 2.2*1.35 = 2.97

Fixed cost = 95000

The break-even point = Fixed cost/(selling price – variable cost) = 95000/(2.97-2.2) = 123376.6 or 123377 shoe racks needs to be sold to break even

4.

Cost to customers is 9.99

Retailers take 45% markup

Then let’s say the retailers’ cost is X. We can equate it as

1.45X = 9.99 or X = 9.99/1.45 = 6.88

They should sell it to retailers at 6.88

Considering that the cost of chrome racks are 3.60. The margin is 6.88-3.60 = 3.28. In this case the markup percentage is 3.28/3.6 = 0.911 or 91.1%