Based in the information contained in Table 1, explain what pricing strategy(ies) HWL will need to adopt for each year: 2019, 2020, or 2021, and why HWL should choose those selected pricing...

Case Study 1:
Answer 1:
As per the information provided in Table 1 of the case study Hot water Limited should go for following pricing strategy during three year period of sales:
a) Pricing at a Premium: In 2019, the company expects to enter market with new product Rayhot. Since the product is new with unique features with very few competition in the market, the company can afford to charge a premium price for the product. Proposed selling price in 2019 for $ 1,000 will enable to earn a premium which is greater than company minimum required rate of return.
b) Pricing For Market Penetration: In 2020, company expects to increase sales to 17,000 units by reducing price. This pricing strategy is for market penetration, where the company will have to face challenges from competitors and reduction in selling price requires to be done in order to gain competitive advantage.
c) Economy Pricing: The company has expected that the product will become obsolete in 2021, so they need to lower the product price further and sell off every units produced. The company expects to sell only 6000 units of products in the last year with minimum price. This can be attributed to the fact that there may be new designs or improved version of the product in the market and customer preferences have changed. Thus, a lower price is required and entire stock needs to be sold off.
Answer 2:
Target Cost Price per unit
Minimum required margin for the company = 20% of Sales
(Assumption: All year to year calculation are done on Absolute value of Selling Price, thus, the Target Cost Price for every year will be calculated in Absolute terms)
Let the target cost price be X
== > Selling Price - 20% of Selling Price = X
== > ( 0.80) of Selling Price = X
The table below provides the target cost price for each year
    Year
     Selling Price
     Target Cost Price
    2019
     1,000
     800
    2020
     800
     640
    2021
     750
     600
Answer 3:
Total Cost Per Unit for 2019, 2020 and 2021
To calculate Total Cost, Average Cost for Pre and Post sales period needs to be calculated and Average needs to be adjusted during sales period
[Note: No Time Value Money Adjustment has been done this calculation as the Absolute amount cost will be considered for manufacturing as well]
Total estimated cost in year 2018 = $ 5,600,000
Total estimated cost in year 2022 = $ 1,00,000
So, the total cost estimated in these two years = $ ( 5,600,000 + 1,00,000) = $ 5,700,000
Total number of units that is expected to be produced = 12,000 + 17,000 + 6,000 = 35,000 units
Therefore, the average additional cost per unit = 5,700,000 / 35,000 = $ 162.86
Thus,
The Total Cost Per Unit = Total Manufacturing cost per unit + Average Additional Cost Per Unit
The Total Cost per Unit for 2019, 2020 and 2021 are presented below in the table:
    Year
     Units Produced
     Manufacturing Cost per unit
     Total Manufacturing cost
     Total additional Cost
     Total Cost exclusive of Extra Cost
     Avg. Extra cost per Unit
     Total Extra Cost
     Total Costs
     Average Cost Per Unit
     2,019
     12,000
     500
     6,000,000
     1,925,000
     7,925,000
     163
     1,954,286
     9,879,286
     823
     2,020
     17,000
     500
     8,500,000
     1,205,000
     9,705,000
     163
     2,768,571
     12,473,571
     734
     2,021
     6,000
     500
     3,000,000
     805,000
     3,805,000
     163
     977,143
     4,782,143
     797

Therefore,
The Total Cost per unit for 2019 = $ 823
The Total Cost per unit for 2020 = $ 734
The Total Cost per unit for 2021 = $ 797
Answer 4:
A comparison of Target cost per unit and Total Cost per unit is provided below
    Year
    Target Cost Price
    Average Cost Per Unit
     2019
     800
     823
     2020
     640
     734
     2021
     600
     797
It can be seen that the company has a higher average cost per unit than target cost price in the year 2019, 2020 and 2021. This will not allow the company to make required profit margin.
To ensure that a minimum margin of 20% of sales is generated by the company, company should select a target cost price of $ 600 (Minimum of the three years target Cost Price) for all the three years.
a) As suggested earlier, Target cost of $ 625 should be selected in 2018 in order to make a minimum profit margin of 20% in year 2019, 2020 and 2021.
For Target cost price of $ 625, Profit margin for each year is calculated below:
    Year
     Target Cost Price
     Selling Price
     Profit Margin
    2019
     600
     1,000
    40%
    2020
     600
     800
    25%
    2021
     600
     750
    20%
It can be seen that the profit Margin for the company is at least 20% of sales in all the three years.
b) The method of value engineering should be adopted to meet the required profit margin of at least 20% in all the three years. Value engineering is a systematic methodology to ensure that the required functions are performed at minimum costs. The main focus would be on the marketing costs and service costs that need to be looked into.
c) The method of value engineering has been suggested in 4b, to meet the profit margin of 20% of sales. This can be done by taking systematic approach in analyzing the functions being done by each department and bring in more efficiency to reduce cost structure. As it can be seen that marketing expense and Supplier training is conducted in 2021 after which the product is bound to get obsolete, so this needs to be eliminated and process needs to be improved to train the supplier in the first three year.
A reduction in marketing expense and training expense by 50 % will be suggested as the extra cost is very high per unit. Moreover, Manufacturing overhead assumed to be 100% of Direct Labour Cost is also at the higher end and is suggested to reduce by 50%.
The Overall impact will be reduced total cost per unit and the company would be in a position to meet the criteria of minimum profit margin.
Calculations with Revised Estimate:
    Costs
    
    Direct Material
    250
    Direct Labour
    125
    Manufacturing Overhead
    50
    Total Manufacturing costs
    425
    Department
    2018
    2019
    2020
    2021
    2022
    Research and Development
     1,500,000
    
    
    
    
    Product and Process Design
     3,000,000
     700,000
    
    
    
    Marketing
     550,000
     400,000
     250,000
     -
    
    Supplier training
     50,000
     87,500
     52,500
     -
     
    Customer Support
     
     187,500
     450,000
     175,000
     75,000
    Total for each year
     5,100,000
     1,375,000
     752,500
     175,000
     75,000
     Year
     Units Produced
     Manufacturing Cost per unit
     Total Manufacturing cost
     Total additional Cost
     Total Cost exclusive of Extra Cost
     Avg. Extra cost per Unit
     Total Extra Cost
     Total Costs
     Average Cost Per Unit
     2,019
     12,000
     425
     5,100,000
     1,375,000
     6,475,000
     148
     1,774,286
     8,249,286
     687
     2,020
     17,000
     425
     7,225,000
     752,500
     7,977,500
     148
     2,513,571
     10,491,071
     617
     2,021
     6,000
     425
     2,550,000
     175,000
     2,725,000
     148
     887,143
     3,612,143
     602
Answer 5:
Life cycle budget for Rayhot covering each year from year 2018 to 2022 is depicted below.
a) Using table provided in the case study
b) Using Table 1 data and target costs in 4a.
c) NPV of the Project...