Premium Essay

Lille Tissages

In: Business and Management

Submitted By sledbett
Words 1200
Pages 5
Question 1
Should Lille Tissages, S.A. lower the price to FF15.00/m? (Assume no intermediate prices are being considered.)

To determine if Lille Tissages, S.A. should lower the price to FF15.00/m or not we need to consider the Variable costs and the Contribution margin associated with Item 345.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.

Fixed costs: “Fixed costs are those that are independent of the level of activity”3 and they are: indirect department expense, Selling and Administrative expense, and General overhead.

Changing the price will alter the unit contribution margin, which is the sale price minus variable cost.

We can see that with a selling price of FF 20.00 / meter the contribution margin per meter is FF13.20. If Lille Tissages, S.A. is to reduce the selling price to FF15.00 / meter the contribution margin per meter will be FF8.51.

Contribution Margin at FF15.00 / meter
Lille Tissages, S.A. expects to be able to sell up to 175,000 meters of Item 345 at
FF15.00 / meter.

Selling price: 15.00
Contribution /unit: 08.51
Total contribution: 1489250.00

Contribution Margin at FF20.00 / meter
Lille Tissages, S.A.expects to sell not less than 75,000 meters of Item 345 at FF20

Selling price: 20.00
Contribution /unit: 13.20
Total contribution: 990000.00

The other possibility is to keep the price at FF20.00 / meter.
The sales director stated that the sales would not be below 75000 units for 2004. This means a profit of FF 15,000,- (Exhibit 6) however, looking at the trend of the market share (Exhibit 1), I do not believe Lille Tissages, S.A. market share will drop to less than 100,000 units for 2004. This would mean a profit of FF213,000,- (Exhibit 6), so between 75,000 units and

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