Cumberland's target market for the new curled metal pads is the construction industry, mainly pile driving contractors, who used cranes to drive piles into the ground. They really had no competitors because it was a new product and the only other products used as replacement for their product were lower quality wooden blocks, asbestos pads or micarta slabs. The two major problems Cumberland faced in this case were: how were they going to determine the initial sales price of the curled metal cushion pads and how were they going to market the product successfully considering most of the industry did not know about it or it's work saving benefits. Some other problems that Cumberland had to solve were whether they were going to purchase new equipment to add capacity, how many sizes of pads would they produce and how much overhead to apply to the new product.
Pricing is the first major problem that Cumberland had to analyze. They had no standard to go by because there was no product on the market like theirs. My analysis in Table 1 shows the cost of each pad to Cumberland, the price Cumberland should sell to distributors (assuming a 40%-50% contribution margin), and the price distributors should sell the product to their customers (assuming a 40% profit margin). .
Table 1 Calculations for contribution margin included .
Total manufacturing cost to Cumberland for each 11.5" pad (50,000 tooling).
$27.28 + $41.90 = $69.18.
$115.50 (From 40% contribution margin below) $138.36 (From 50% CM below).
$ 69.18 (TMC from exhibit 6) $ 69.18 (TMC from exhibit 6).
$ 46.32 (Contribution margin per unit) $ 69.18 (Contribution margin/unit).
Selling price Cumberland should set for 40% contribution margin:.
$115.50 (selling price) - $69.18 (TMC) = $46.32/$115.50 = 40% margin.
Selling price Cumberland should set for 50% contribution margin:.
$138.36 (selling price) - $69.18 (TMC) = $69.18/$138.36 = 50% margin.