Lipman Bottle Company, the leading bottle distribution company in Albany, New York started distributing bottles of large bottle manufacturers on 1909. From then on, they started to adapt to the changes in the bottling industry such as the use of plastics, which prove to be profitable on their end. They grab the opportunity to distribute and print bottles with different shapes and sizes for clients who liked the convenience of their dual services. Their track record became unstable when the US economy got worse and competitors opted to cut prices of their products. Robert Lipman, the vice president of the company, realized that they have no choice but to cut prices as well so they can keep up the competition. However, he was unsure on how to cut the prices or what products he must cut so that they could survive the economic downfall. He also stated that one way to keep the business going was if they could spread their distribution to pharmaceutical and cosmetics manufacturers.
Statement of the Problem
What pricing must Lipman Bottle Company adapt in order to achieve the goal of 30% margin?
The objective of the case study is to determine the correct pricing that Lipman Bottle Company must adapt to ensure that they would continue to be profitable and achieve the company’s goal of reaching 30% margin.
Analysis and Solution
Variable costs were computed per 1,000 bottles were computed based on the different combinations given on the case. Tables 1-2 shows the variable costs for Albany while Tables 3-4 shows the variable costs for the New York-New Jersey market:
Table 1. Variable costs of smaller size bottles for Albany Market
Table 2. Variable costs of bigger size bottles for Albany Market
Table 3. Variable costs of smaller size bottles for New York-New Jersey Market
Table 4. Variable costs of bigger size bottles for New York-New Jersey Market
After which, we derived the break even prices for each combinations and the recommended prices based on Mr. Lipman’s goal of 30% margin:
Table 5. Break even prices for smaller size bottles, Albany Market
Table 6. Break even prices for bigger size bottles, Albany Market
Table 7. Break even prices for smaller size bottles, New Jersey-New York Market
Table 8. Break even prices for bigger size bottles, New Jersey-New York Market
How did the Mr. Lipman’s goal of a 30% margin at capacity affect your price recommendation? Comparing the increase and decrease of prices among three production scenarios, the 30% margin will reflect an increase of 23% on price from 1 separation to 2 separation round due to the addition in labor. Whereas, a projected decrease of 16% from 2 separation round to 2 separation oval because of the labor conversion to semi-automatic Table 9. Prices (with 30% mark up) for small bottles, Albany – Lower size (0-1 oz)
Same principle follows when you refer to the table for big bottles. Table 10. Prices (with 30% mark up) for big bottles, Albany – Bigger size (17-32 oz)
Table 11. Prices (with 30% mark up) for small bottles, New York-New Jersey – Small size (0-1 oz)
Table 12. Prices (with 30% mark up) for bigger bottles, New York-New Jersey – Bigger size (17-32 oz)
In spite of charging a higher price for 2 separation round, it may seem that it is more profitable with the New Jersey Higher Size with $105.37. But in reality, the $95.66 will have more profit compared to $105.37 because assuming that at 95.66 per unit, you multiply it with 100,000, which is the minimum production, you will still profit more because of the quantity. And to add, the cost of production is much lower compared to producing less like what was charged to New Jersey Higher Size with 5,000 – 9,999.