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Chapter Three Case Study: Ritter & Sons Background What is Ritter & Sons’ business? A wholesale producer of potted plants and cut flowers. Most popular product? Potted mums Who is Mr. Don Ritter CFO What did he want to do after attending a seminar on pricing? Raising or lowering the current price for more profits What did Don do first? Identifying the relevant cost and contribution margin for mums. What costs are incremental cost? What costs are unincremental? What about labor cost? And capital cost? Cost Projection for Proposed Crop of Mums Relevant Cost of Mums Collecting More Information on Production Quantities and Prices Three crops of mums during the year Two during seasons with excess capacity One during the peak season without excess capacity Ritter charged the same price ($3.85) for mums throughout the year What is the problem with the original pricing? Calculating Breakeven Sales Changes for Proposed Price Change 5% Off-Peak Season Price Cut %Breakeven sales change = - ΔP / (CM + ΔP ) =-(-5.0 %) / (58.5 %– 5.0%) = 9.3 % Cont’d 10% Peak Season Price Increase %Breakeven sales change =-10.0 % / (58.5% + 10%) =-14.6% %Breakeven sales with incremental fixed costs = -14.6% + $Change in fixed costs / New $CM x Initial unit sales =-14.6% - $9,000 / ($2.635 x 45,000)=-22.2% Judging Actual Sales Change Sue James felt certain that sales during the peak season would not decline by 22.2% following a 10% price increase. Why? Mums as gifts in peak season Sensitive to quality not price Major competitors could not match Ritter’s quality due to long distant shipping Local competitor had not capacity to serve more customers Cont’d Concerning the off-peak season price cut Current customers could not buy 9.3% more Could other customers switch to Ritter? Depending on competitors’ reactions also How did Rod and Sue get the information? Talking with customers and with Ritter employees who had worked for competitors Learned that they faced with two types of competiti
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