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Case Submission 3:
Signode Industries
Submitted by:
Ayush Vasishtha (B13017)
Dhruv Gupta (B13083)
Subhro Mukherjee (B13118)
PROBLEM IN HAND:
Mr. Gary Reed, president of SI, must decide
Whether to pass on or absorb a 6.8% increase in the price of cold rolling
steel
Whether to accept the flexible pricing policy (Price-flex) that will
authorise SI salespeople to discount the book price as much as 7%
ISSUES AT HAND:
SI is the leader, its action will dictate the future of the market
And most importantly, this division is the cash cow to fund expansions of the
mother company, so cash is important!
The idea is we need to look at scenarios on financials- Profit, Profitability and Cash flow.
There are 4 scenarios for the two questions above. i.e.
1. Pass 6.8% increase to customers and reject price flex
2. Pass 6.8% increase and accept Price Flex
3. Absorb 6.8% increase and accept Price Flex
4. Absorb 6.8% increase and reject Price Flex
Current Data obtained from exhibit 1:
SALES FORCE SITUATION
Pass 6.8% increase to customers and reject price flex Here the sales team will
be unhappy as the price has been passed to the customer and flexible price has
not been given as a power to the sales force. This would result in loss of market
share although margins will remain high.
Pass 6.8% increase and accept Price Flex : In such a scenario, sales people will
neither be completely happy nor unhappy. Their price will increase leading to a
chance of reduction in market share, which will have to be countered by the flex
pricing option provided.
Absorb 6.8% increase and accept Price Flex- Here the sales person will be happy
since the price remains the same (it is absorbed) and he also has the flexibility to
customize discounts according to the type of benefit customers want. There will
be increase in market share but margins will be hit.
Absorb 6.8% increase and reject Price Flex In this case the price is absorbed
which will make the sales people happy and will increase the moral but the
ability to make flexible pricing is removed which will make them inflexible.
Hence they wont be able to set discounts as per the requirement and they will
not be completely happy either
1983
Market Size
714875
% Market Share
40%
Revenue
285950
100.00%
Cost of Sales
181473
63.46%
2879
1.01%
0.00%
101598
35.53%
Selling Expense
24178
8.46%
Material
management
General Adm.
Expense
Direct Expense
12560
4.39%
8547
2.99%
45285
15.84%
550
0.19%
56863
19.89%
9975
3.49%
R&D
Freight
GM
Other income
Operating income
Other income
EBIT
46888
16.40%
Calculations:
New Cost= 104.62 times of old cost
Steel strapping original percentage of total cost= Raw material as percentage of
Apex*Weightage of sale of Apex +BBM Raw material*weightage+HDM*Weightage of
HDM = 67.89%
New Cost= 67.89%* 1.068%+ (1-67.89%)=104.62%
If we take packaging industry into account:
Baseli
ne
Market
Size
% Market
Share
Revenue
CS
Pass+
Accep
t
Price
Flex
CS
Absor
b+
Accep
t
Price
Flex
CS
26724
3
18985
1
24178
100.0
0%
71.04
%
1.08
%
0.00
%
27.88
%
9.05
%
12560
4.70
%
Absorb
+
Reject
Price
Flex
CS
40.00%
Cost of
Sales
R&D
Freight
Selling
Expense
Material
manage
ment
General
Adm.
Expense
Direct
Expense
Other
income
Pass
+
Rejec
t
Price
Flex
714875
28595
0
18147
3
2879
GM
CS
10159
8
24178
12560
8547
100.
00%
63.4
6%
1.01
%
0.00
%
35.5
3%
8.46
%
4.39
%
29915
1
18985
1
24178
100.
00%
63.4
6%
0.96
%
0.00
%
35.5
7%
8.08
%
12560
4.20
%
2879
0
10642
1
2.99
%
8547
45285
550
15.8
4%
0.19
%
45285
550
2.86
%
15.1
4%
0.18
%
27958
0
18985
1
24178
100.
00%
67.9
1%
1.03
%
0.00
%
31.0
6%
8.65
%
12560
4.49
%
2879
0
86851
8547
45285
550
3.06
%
16.2
0%
0.20
%
2879
0
74513
8547
45285
550
3.20
%
16.95
%
0.21
%
189851
100.00
%
66.39
%
2879
1.01%
0
93220
0.00%
32.60
%
24178
8.46%
12560
4.39%
8547
45285
2.99%
15.84
%
550
0.19%
285950
Operatin
g income
Other
income
EBIT
56863
9975
46888
19.8
9%
3.49
%
16.4
0%
61686
9975
5171
1
20.6
2%
3.33
%
17.2
9%
42116
9975
32141
15.0
6%
3.57
%
11.5
0%
29778
9975
19803
11.14
%
3.73
%
7.41
%
16.96
%
48485
9975
38510
3.49%
13.47
%
As per the calculations EBIT is highest for Scenario 1, i.e Pass 6.8% increase to
customers and reject price flex.
Probable reasons for change in market share which are not factored in the above
calculations :
1. Pass 6.8% increase to customers and reject price flex: Reduction in market share
by 2-3% owing to no price flex
2. Pass 6.8% increase and accept Price Flex- Market share is supposed to increase
2-3%
3. Absorb 6.8% increase and accept Price Flex highest increase in market share
assuming it is supposed to jump around 6-7 %
4. Absorb 6.8% increase and reject Price Flex: same as 1.
Therefore if they want to increase market share, they should adopt Price Flex and
Absorb the price increases. However, EBIT will be severely hit.