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Paulson Precision Case

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PAULSON PRECISION PRODUCTS, INC.

TEAM 10 - P2F10

1.a. What price should PPP charge for its pads?

• $1300 for Colerick Foundation Company – First purchase.

• $1400 for distributors.
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1.b. Explain the reasons for the recommended price.

As it is shown on the table above, the economic value for the tests involving 11 ½" pads ranged from $1400 to $1900, which represents the maximum a customer would pay in either case. Because there is not enough data to adequately determine whether the true value for an 11 ½" pad is $1400 or $1900, we should select the lower of the two as the maximum price. Therefore, the upper price limit for PPP's curled metal pad is $1400. On the other hand, if PPP decides to price their product based only on material costs of the existing product, the price would be closer to $167 (6 CMI pads used, $1000 worth of asbestos pads). This results in a pricing range of $167 to $1400, with the lower price recovering fixed costs and a small profit.

In choosing the optimal price, PPP should take advantage of the performance and operational benefits that its product offers. Not only are the pads more efficient and last longer, they are easier to handle, reaching temperature that are almost three times less then those of wooden pads. There was significant savings gained by using PPP pads in both tests, ranging from 29 to 35%. Customers should be willing to pay for these benefits, especially when presented to them in terms of their economic value. Therefore, PPP should price the product as close as possible to the economic value for the customer.

In pricing the pads, PPP should follow the Consumer Value Pricing. For example, PPP could quote to the Colerick Foundation a relatively low price of $800 per pad as a first time customer purchasing directly from PPP. Colerick will be happy to pay this price because they are…...

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