Classroom Software

Pricing Model

The Pricing Model is a mathematical model that lets you play the "What if?" game by making a set of decisions within a competitive business environment and seeing the results in the form of an income statement and operating statement. Your objective is to maximize net profit after income taxes. The model is called the Pricing Model because the business environment is most sensitive to the pricing decision. There are three other decisions--marketing budget, research & development (R&D) budget, and plant investment. The model simulates the effect of these decisions on a single product in the product line.

The model is a dynamic model--it simulates business activity over a period of time. You will simulate four quarters of activity. It is a satisficing model (not an optimizing model) in that it will not tell you the best combination of decisions. You will have to figure that out for yourself by executing the model multiple times, searching for the best combination. Although you can change all of the decisions each quarter, the prescribed simulation technique is to change only one at a time so that you can most easily see the impact. A suggested technique is to manipulate one decision until you feel that it is at the optimum level and then manipulate another. Continue this until you have manipulated all decisions. Then, fine tune your decision set by making any adjustments that appear to make for optimum results.

As you simulate each set of decisions you should keep a written record of the decisions and the results (net income). After you have reached what you believe to be the optimum decision set, obtain a printout.

Downloadable Files

For Word 7.0 and Excel 7.0 or earlier users:

	Pricing Model	price5.xls	319kb
	Corresponding Spreadsheet	excel1.xls	32kb
	Web Page	software.doc	18kb

For Word 97 and Excel 97 users:

	Pricing Model	price5nt.xls	363kb
	Corresponding Spreadsheet	excel1.xls	32kb
	Web Page	software.doc	18kb

NOTE - The Excel file 'price5nt.xls' is operated with a Visual Basic Macro. In order to properly run the file, you must select "Enable Macros" when prompted by your Excel 97 program. If you choose to "Disable Macros", the file will not run properly.

For the assignment, assume that you are a staff analyst for the executive committee of your firm and that you have been given the assignment of using the model to recommend a set of decisions to the committee. The vice president of marketing is especially interested in the price and marketing decisions, the vice president of manufacturing feels the plant investment decision is most crucial to his operation, and the vice president of research is partial to the R&D decision. The president and the vice president of finance have an equal interest in all four decisions. The president has asked you to use the model to identify the best decision set and document your findings in a memo, identifying the decisions and explaining why each one is the best. The president's name is Marion Davies.

In order to explain the decisions you must understand the environment in which the decisions are made. The environment consists of such external factors as an economic index that reflects the health of the general economy, a seasonal index that reflects the fluctuation in demand for your product, the price charged by your main competitor, and the marketing budget of your main competitor. It is a competitive environment where success depends not only on what you do but also what your competitor does. The model environment also consists of such internal factors as plant capacity, raw materials inventory, and finished goods inventory. You can obtain a printout that describes the details of these influences by using the model's Help system.

The Modeling Scenario

Listed below is a set of sample values for the modeling scenario. Your instructor will advise you whether to use these, or other, values for your assignment.

Previous Quarter

Plant capacity	800,000
Production units	975,000
Raw materials inventory	$1,450,000
Finished goods inventory	85,250
Price	$39
Plant investment	$0
Marketing	$45,000
Market potential	975,000
Economic index	1.15
Seasonal index	.95
Competitor price	$40
Competitor marketing	$42,500

Next Four Quarters' Projections

	Q1	Q2	Q3	Q4
Economic index	1.35	1.37	1.41	1.45
Seasonal index	1.05	1.25	1.35	.95
Competitor price	$34	$33	$32	$31
Competitor marketing	------$50,000 each quarter-------

Assignment Specifications

* Packaging To be specified by your instructor

* Due Date To be specified by your instructor

Decision Constraints

When you make the plant investment and R&D decisions, the only constraints are those built into the model. However, when you make the price and marketing decisions, you can vary the amounts by no more than 10 percent from the previous quarter.