In July 2000, one of the Berkshire Threaded Fasteners Company's competitors Bosworth announced a price reduction on the 100 series from $2.45 to $2.25 per 100 pieces. As the profit and loss by Product from January 1 to June 30, 2000, the reduction of the unit sales price of Series100 from $2.45 to $2.25 would mean that the unit sales price would be below the total unit cost of $2.29.This should mean substantial losses to the bottom line. However, Cook forecast that if they hold the price at $2.45 price during the last six months of 2000, unit sales would be 750,000 100-piece lots, the revenue would be $1,838,000 ($2.45* 750,000= $1,837,500). Cook felt that if the price were dropped to $2.25 per 100 prices, the six months' volume would be 1,000,000, the revenue would be $2,250,000 ($$2.25* 1,000,000= $2,250,000). Based on this, in last six months of 2000 they would sell more of their 100 series than any of the other series. In addition, from Appendix 2 we can see if the price of the 100 series reduced from $2.45 to $2.25 in 2000, the selling price will be reduced from $2.42 to $2.22, so the incremental profit should be 90,000. Appendix 2 shows that reduction in unit sales price to $2.22 will indeed create break-even production quantity of near one million units as projected. This reduction would not increase operating income, the overall total for the year would at $90,000. In my opinion, they can reduce the price of the 100 series from $2.45 to $2.25. Above all Bosworth has already have the price cut on this series and to be competitive in the market, Berkshire's share of industry sales was 12% for the 100 series, it is the most product in all series, so Berkshire should reduce the price of 100 series otherwise it will lose the market share in the business. Lowering their price to meet the competitor would be a good idea. Thus, the low price is hardly a viable option for company in the future. (http://www.slideshare.net/MelyndaDaugherty/berkshire-threaded-fasteners. Cited 22 Dec 2012).
During 1999, Berkshire's share of industry sales was 12% for the 100 series, 8% for the 200 series and 10% for the 300 series. 100 series has the biggest proportion in the all products. In the case Exhibit 2- Analysis of profit and loss by product for year ended December 31, 1999. The profit of 100 series was $295,000, but both of the 200 series and 300 series at the loss state. Also in the Exhibit 4- profit and loss by product from January 1 to June 30, 2000, 100 series' sales status is the best. Beyond that, in the Appendix 3 the Contribution Margin Ratio for 3 product lines in 1999, we can see the Contribution Margin Ratio for this 3 series were 48.36%, 45.63%, 42.59%. Contribution Margin Ratio referred to as gross profit colloquially. It reflects the ability of products make the contribution to the enterprise. 100 series costs them about 1.68 to produce 100 units and they sell 100 units for 2.45. This is a 0.73 per 100 unit contribution margin. Even if you include the fixed costs, this becomes the only profitable line. Therefore, the 100 series is the Berkshire's most profitable product line.
In order to long-term development, I have some advices for Mr. Magers. First of all, is possibly investing. In the past, Bosworth announced prices annually and the other producers followed suit. Eventually Bosworth, with its strong financial position, again stabilized the situation following a general recognition of the failure of price cutting. A strong company which has the strong financial position can live in the price war, but the small companies maybe die. Berkshire sells a commodity product in an industry where several of its competitors are much larger. Bosworth, the dominant company, has announced a price reduction on product line 100. Berkshire has no alternative but to meet Bosworth's price. The choice is to match the new price or exit the business. Berkshire is not the "market leader", they just can follow the price. If they attract the investment, make them stronger, they can have more power in the market. Secondly, Berkshire accepts the idea that their products are commodities, no attempts at differentiation. They can create a new product line, only they support these. Thirdly, cost reduction. All the products of the different manufacturers in the industry are very similar. Proving their business strategy is in fact cost leadership. Another piece of evidence that also supports this strategy is the fact that the major focus of their accounting system seems to be on cost reduction. (http://www.writework.com/essay/berkshire-threaded-fasteners-case. Cited 23 Dec 2012).
In conclusion, Berkshire Threaded Fasteners Company has a lot of strategies need improvement. They cannot drop the 300 series; in last six months of 2000 they can reduce the price of the 100 series to follow the Bosworth, but they should change this situation; In addition, 100 series is the most profitable product line, they must lay stress on 100 series.
Appendix1 - The effect on the profit for the first six months of 2000 if the company had dropped the 300 series at January 1, 2000.
Working:
Total incremental loss= $1.15* 501,276units = $576,467.4
Appendix2 - If the price of the 100 series reduced from $2.45 to $2.25 in 2000, the selling price will be reduced from $2.42 to $2.22.
Working:
Incremental Revenue = $2.22*1,000,000- $2.42*750,000 = 405,000
Incremental Cost = ($0.61+ $0.63+ $0.01+ $0.01)*(1,000,000-750,000) = 315,000
Appendix3- Contribution Margin Ratio for 3 product lines in 1999.
Working:
100 series per 100 pcs. UVC = 0.61+0.63+0.01+0.01 = 1.26
200 series per 100 pcs. UVC = 0.59+0.75+0.02+0.01 = 1.37
300 series per 100 pcs. UVC = 0.70+0.81+0.03+0.01 = 1.55
