Avon Case Study

 Q5. Price for 5 hp EAS drive

1. First, we used mathematical tools to analyze the price that could make maximum profits. We used price and unit sales from Exhibit 5.

1. To estimate the Avon’s annual sales, we used statistics from Exhibit 2. From Exhibit 2, we estimated that sales of 5 hp EAS drive at MASD prices accounted for 11% of Avon’s total sales in units and sales of 5 hp EAS drive at EASD prices accounted for 10% of Avon’s total sales in unit. According to the 5 hp sale proportion, we expected that the proportion of 5 hp sale in Avon’s annual sales in units is 10%.
2. To calculate the units cost of EAS, we worked out the rate of production per week. Based on Avon’s annual sales, the rate of production per week can be worked out through the annual sales divided by 52 week per year. If the rate of production was over 200 units, a 5 hp unit cost could be $2995. If the rate of production was 100-200 per week, a 5 hp unit cost would increase by 20%, which is 3594. If the rate of production was 50-100 per week, a 5 hp unit cost would increase by 40%, which is $4193. If the rate of production was 30-50 per week, a 5 hp unit cost would increase by 50%, which is $4492.
3. According to the unit cost, we worked out the unit margin and total profit of 5 hp EAS. We could find out the price that could make maximum profits is $4400.

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1. Analyze 5 hp EAS drive pricing at $3750 & $7350

1. Price according to both mathematical calculation and pricing strategy

The price for maximum profit was $4400. However, accounting to the facts and pricing strategy, the suggested price for 5 hp ESA drive is $4700. Reasons are followed:

1. When the price is between $4100 and 4700, we could guarantee a certain sales and market size for Avon on the premise of obtaining a certain profit which is over 1.9 million.
2. According to the product Avon has already had, MAS at low price and AVDC at high price, we took lining price into account that new EAS drive with appropriately high price, $4700, could protect MAS’s and AVDC’s sale.
3. As we known that the maximum profit price is $4400, we could reserve for the discount space for those who are sensitive to price and would purchase more, such as OEMs.
4. In light of competition which would come into market in 1.5-2 years, we could lower our price to compete with competitors without losing too much profit.