Pricing

A case study: An industrial chemical company looking at price viability

An industrial chemical manufacturing company realizes the demand for one of their chemicals in a new market segment.The new market segment requires the company to set up a new facility for the manufacturing and packaging of the same.Traditionally this company has been making supplies in bulk packing whereas the new project requires it to pack the chemical in glass bottles of one litre each.

They install a capacity of manufacturing 10,000 bottles 1 litre per day.On an average this plant can be operational for 300 days in a year.The investment is building,plant and machinery is INR 1 crore

The data are as follows.

Bought out items

Glass bottle | Rs.3.0 per bottle |

Cap | 0.30 per cap |

Label | 0.20 per label |

Sealing sleeve | 0.08 per sleeve |

Packing Carton | Rs.9.0 per carton,used for 12 bottles |

Sealing Tape | Rs. 0.12 per carton,used for 12 bottles |

Other Costs

Electricity | Rs 0.02 per bottle of 1 litre |

Cost of chemical X | Rs. 0.02 per bottle of 1 litre |

Cost of chemical Y | Rs.0.02 per bottle of 1 litre |

Transportation cost | Rs.15 per Carton |

Excise | 10% Ex.factory price |

Sales Tax | 5% of ex factory price inclusive of excise |

Fixed Costs

Salaries and Wages | Rs. 1,00,000 per month |

Advertisement and publicity | Rs. 10 lakhs per annum |

Insurance | @ 2 % of capital investment |

Depreciation | @ 15 % of capital investment |

Interest | Company has a term loan of Rs 0.50 croresat an interest of 15% per annum and has availed working capital limits of Rs.5 lakhs from a bank at an interest rate of 18% per annum |

The company has a contract of three years.The price per bottle in the first year is Rs. 8.00 per bottle with an escalation clause of 10% in the subsequent years.

The company hopes to achieve a capacity utilization of 40% in the first year,50% in the second year and 60% in the third year.

Please discuss

1.How viable is...