George Robson, new controller for Medi-Displays Inc. (MDI), has been asked by the firm’s president to review a request from a customer, PharmaMart, to reduce MDI’s selling price on its specialty narcotics cabinets from $4,200 /unit to $2,650/unit. A similar cabinet has come onto the market for $2,650/unit by a competitor. If granted, this request would break a 10-year exclusive contract between the supplier and the buyer eight years before the contract expires. PharmaMart is a major customer responsible for much of MDI’s growth and for 25% of MDI’s sales last year. Internally, the marketing manager likes the proposal. The production manager does not, and the president (and owner) is concerned about current and future profits. Robson must prepare a full repot with his recommendations.
Students are introduced to decision making and the appropriate analysis that should be completed before making a decision. Industry data on the Canadian retail pharmaceutical industry is provided as a backdrop to help students understand the customer’s request for a price reduction amid the changing retail pharmaceutical landscape. Students are encouraged to assess and consider the “bigger picture” perspective –this customer is responsible for 25% of MDI’s total revenue-and its impact on their final decision. Quantitatively, students must perform a financial analysis at the two retail selling price points. To do a proper case analysis, students should be familiar with cost behavior. Students must apply their understanding of cost behaviour and the effect of volume on pricing decisions to correctly analyze this case. Also reinforced is the importance of qualitative analysis before rendering a final decision.
Consumer and competitive analysis, understanding of cost behaviour, breakeven analysis, R.O.I.
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