Sean McIntyre

Beauregard Textile Case Study

11/22/15

Beauregard is currently facing a complicated predicament of how to price their Triaxx-30 fabric.
They recently raised the price from $3 to $4 in the past year and this has caused them to lose a
considerable amount of market share due to the fact that their main competitor, Calhoun &
Pritchard, has maintained a price of $3. There are four possible situations that may arise given
the fact that Calhoun & Prichard may raise their price to $4 as well due to recent financial
constraints they are facing.

1. Beauregard: $4, Calhoun & Pritchard: $3

2. Beauregard: $3, Calhoun & Pritchard: $3
3. Beauregard: $4, Calhoun & Pritchard: $4
4. Beauregard: $3, Calhoun & Pritchard: $4

1. The first case is the current situation with Beauregard being priced at $4 and Calhoun &
Pritchard being priced at $3. This situation yields Beauregard 75,000 units in volume. This
would yield $300,000 in sales with variable costs adding up to $297,000. This provides
Beauregard with a contribution margin of $3,000.

Volume Price Total

Sales 75,000 $4 $300,000

Costs 75,000 $3.96 $297,000

Contribution Margin $3,000

2. The next case would involve Beauregard dropping its price back to $3 which would allow
them to regain volume due to their location advantage and Calhoun and Pritchard maintaining
their current price of $3. This would yield a volume of 125,000 units at a price of $3.310 which
would lead to a contribution margin loss of $38,750.

Volume Price Total

Sales 125,000 $3 $375,000

Costs 125,000 $3.31 $413,750

Contribution Margin -$38,750

3. The third scenario suggests that due to the financial constraints placed on Calhoun &
Pritchard, they have decided to raise their price to math that of Beauregard at $4. Assuming
Calloway’s prediction to be true, the overall demand for T-30 fabric would then be reduced by
20% due to the fact that no company is offering it at $3. The overall demand was consistently
around 225,000 which would mean 40,000 customers would be lost given the new price point.
This change has reduced the size of the market to 185,000. Given the assumption that
Beauregard generally has a 25% market advantage over Calhoun & Pritchard when they’re
products are priced equivalently due to their locational advantages, Beaureagard will now have
a volume of approximately 100,000 as well as a total cost of $3.574 per yard of T-30 fabric
which leads to a contribution margin of $43,000.

Volume Price Total

Sales 100,000 $4 $400,000

Costs 100,000 $3.574 $357,400

Contribution Margin $43,000

4. The fourth scenario would entail Beauregard dropping the price to $3 while Calhoun &
Pritchard respond by raising their price to $4. This would be a logical response to Beauregard’s
price decrease even given their reluctance to raise prices due to the fact that Beauregard will
cut into the market share because of their locational advantages. Assuming the same market
shares as the one quarter in which Calhoun & Pritchard’s price was at $4, Beauregard has a
volume of 200,000. This would yield a total cost of $3.102 per yard of T-30 fabric and a
contribution margin loss of $20,400.

Volume Price Total

Sales 200,000 $3 $600,000

Costs 200,000 $3.102 $620,400

Contribution Margin -$20,400

Conclusion

The analysis of the four scenarios has lead me to conclude that Beauregard should maintain
their price of $4 per yard of T-30 fabric. No matter how Calhoun & Pritchard reacted to
Beauregard’s price decrease, the $3 price is plainly just an unprofitable price point. Both
scenarios involving a $3 price returned net losses. There is simply not enough volume in the
market for T-30 to support a $3 price given such high marginal costs. I believe the first scenario
is the most likely due to Calhoun & Pritchard’s high reluctance to raise prices. Though this
happens to be the same situation as it currently is which does not help the market share qualms
of Beauregard, the price structure still yields a profit, and if Calhoun & Pritchard are forced to
raise their price to $4, which is inevitable it is more so just a question of when, Beauregard
stands to be in the most profitable of all the scenarios. Beauregard should maintain their current
price of $4, lowering the price to $3 would only translate to a net loss.