Forner Carpet Company produced high-grade carpeting materials for use in automobiles and recreational vans. Forner’s products were sold to finishers, who cut and bound material so that it would fit perfectly in the passenger compartment or cargo area (e.g., automobile trunk) of a specific model vehicle. These finishers also made carpet floor mats. Some of these finishers were captive operations of major automobile assembly divisions, particularly those that assembled the "top of the line" cars that included high-grade carpeting; other finishers concentrated on the replacement and van customizing markets.
Late in 2003, the marketing manager and the chief accountant of Forner met to decide on the list price for carpet number L-42. It was industry practice to announce prices just prior to the January-June and July-December "seasons." Over the years, companies in the industry had adhered to their announced prices throughout a six-month season unless significant unexpected changes in costs occurred.
Forner was the largest company in its segment of the automobile carpet industry; its 2003 sales had been over $40 million. Forner’s salespersons were on a salary basis, and each one sold the entire product line. Most of Forner’s competitors were smaller than Forner; accordingly, they usually awaited Forner’s price announcement before setting their own selling prices.
Carpet L-42 had an especially dense nap; as a result, making it required a special machine, and it was produced in a department whose equipment could not be used to produce Forner’s other carpets. Effective January 1, 2003, Forner had raised its price on this carpet from $3.95 to $4.75 per square yard. This had been done in order to bring L-42’s margin up to that of the other carpets in the line. Although Forner was financially sound, it expected a large funds need in the next few years for equipment replacement and possible diversification. The 2003 price increase was one of several decisions made in order to provide funds for these plans.
Forner’s competitors, however, had held their 2003 prices at $3.95 on carpets competitive with L-42. As shown in Exhibit 1, which includes estimates of industry volume on these carpets, Forner’s prices increase had apparently resulted in a loss of market share. The marketing manager, Kim Gurskis, estimated that the industry would sell about 630,000 square yards of these carpets in the first half of 2004. Gurskis was sure Forner could sell 150,000 yards if it dropped the price of L-42 back to $3.95. But if Forner held its price at $4.75, Gurskis feared a further erosion in Forner’s share. However, because some customers felt that L-42 was superior to competitive products, Gurskis felt that Forner could sell at least 75,000 yards at the $4.75 price... .
- What was the relationship (if any) between the L-42 pricing decision and the company’s future need for capital funds?
- Assuming no other prices are to be considered, should Forner price L-42 at $3.95 or $4.75?
- If Forner’s competitors hold their prices at $3.95, how many square yards of L-42 would Forner need to sell at a price of $4.75 in order to earn the same profit as selling 150,000 square yards at a price of $3.95?
- What additional information would you wish to have before making this pricing decision? (Despite the absence of this information, still answer Question 2!)
- With hindsight, was the decision to raise the price in 2003 a good one?