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05-02-2019

Product code Accounts-PH319

Customer Value Pricing - Halogen Lighting Inc.

Halogen Lighting Inc. has developed a new commercial light bulb based on halogen technology. It provides comparable lighting as conventional General Electric Soft White bulbs but has an average life expectancy of 4 times greater based on Consumer Reports testing (2 years versus 6 months). Halogen has an opportunity to close an exclusive deal with Wal-Mart to sell millions of bulbs over the next five years, displacing a significant portion of General Electric’s business.

You have been asked to determine a fair list price for a 4 pack of the Halogen bulbs. You need to consider how much the end customer should be willing to pay for the long life bulbs; how much margin Wal-Mart will require to close the deal; and how much margin Halogen Lighting Inc. should earn. Following are the important data you will need:

GE Soft White                       Halogen Lighting

Retail Price for 4 Pack           \$3.00                                       To Be Determined

Variable Cost/ 4 Pack             \$1.50                                       \$4.00

Margin % for Wal-Mart              30%                                    To Be Determined

Halogen Lighting will spend \$3,500,000 in fixed costs in the first year for R&D, Manufacturing, and SG&A. Assume the average Wal-Mart customer has an 8% cost of capital.

• How much should a Wal-Mart customer be willing to pay for a 4 Pack of Halogen bulbs that will last 4 times as long as Soft White bulbs. Assume the customer normally replaces the four Soft White bulbs every six months. (Hint: consider the time value of money!!)

• How much margin \$ will Wal-Mart earn at this price assuming a 35% margin - higher than Soft White to encourage them to sell Halogens?

• How much margin \$ does Wal-Mart currently earn on sale of four 4 Packs of Soft White bulbs at 30% margin (again, remember time value of money!)?

• How much margin \$ does Halogen Lighting earn at full customer price (assuming same 35% margin for Wal-Mart)?

• What is the breakeven in units at full customer price?