Business Report based on Excel Sheet workings and calculations
For the application of this paper, it is required that a comparative study in different scenarios be conducted to understand the implications of economic models and pricing theories on two products – brand X and brand Y. The data for this paper has been collected from actual supermarkets and by using analytical techniques it would be seen how the marginal cost, revenue and other economic functions react when the market scenario changes. These two brands – X and Y, are available in two versions, one is the regular version and the second one is a light version or the lite version.
For any product, it is imperative that a well laid out strategy be adopted to make it successful among customers. To this end, the two products that have been chosen for this paper and analysis see two types of promotions. The first is the price promotion which usually means that some kind of incentive like a discount or a reduction of a fixed amount from the selling price is given to the customers. The second type of promotion discussed here is in – store ad display or ad promotion. This refers to the practice of using promotional material such as display boards and floaters inside the premises that carry the brand name of the product. This induces the consumers to try the product and makes the brand recognizable and so is considered as a promotional material.
Some of the definitions and terms which have been used in this paper need to be described for better understanding.
Marginal Cost can be defined as the change in the total cost of a commodity which arises when one extra quantity of the commodity is manufactured or produced. This term is also used in relation to selling where it is called marginal selling. Marginal cost is influenced by a number of factors which can be market driven or can be particular to the producer.
Total Variable Cost can be described as the sum of all variable expenses. Variable expenses are those which change or vary with the proportion to production of a commodity or provision of any service by the producer. They can also be called as average costs or as the sum of marginal costs over all units produced.
Revenue is the amount which the producer or seller earns when it sells its commodities of services. It is the return that a producer or service provider gets from the consumer.
Markup cost can be seen or can be defined as the difference between the cost of a commodity or a service and its selling price. This usually is an indication of the profit that a producer or service provider will be able to able to earn at a particular price or the loss that would be incurred.
Price Discrimination is the theory which has been used in this paper. It means that differential prices are charged from different consumers which can be on the basis of location, business specification etc.
In this paper, the first task has been related to the computation of total variable cost or TVC. As mentioned, TVC is the total variable cost which the company incurs as a result of its production activities. In this case, since the marginal cost of the product has been given and the total amount sold has been given in the raw data, total variable cost can be computed as a product of both. This can be so because the marginal cost stands for all the variable cost that a producer would incur. The next part of the job is calculating the markup over price ratio. This ratio shows what percentage of the total selling price is the markup or the profit. The calculation for both the products shows that there is a consistent markup ratio for all stores over all the weeks for which the data has been collected. This shows that the producer and the seller have consciously decided what the profit margin would be and added that to the cost to arrive at the final selling figure.
The markup ratio for Brand X is 0.17 which means a profit margin of 17% and the markup for Brand Y is 0.19 which means a profit margin of 19%.
In the next task, a pivot table for the two products has been created to see how active the stores are in indulging and planning promotional activities for the brands. The instances when no promotional activity was planned are fewer in both cases, but comparatively are more in case of Brand Y, which means that promotional activities are carried more actively for Brand X and less actively for Brand Y. This could be because brand Y already has recognition among the customers, and its sales are not affected to a very large degree by such promotions. It can also be viewed that both the products do not indulge in promotions at the same time which might mean that they avoid head to head conflict of promotions. One part of this analysis has been to see if there is any change in the promotional activities of lite and regular versions. The data shows that there is no such substantial difference and that promotional activities for the brand as a whole are conducted and for its versions separately. But it is interesting to note that the number of promotional activities remains the same every week for both the products combined.
For the next job, a scatter plot was created to see hoe scattered the data related to the two brands is. This is a method to examine whether any distinct correlation exists between the raw data or if each observation is unique in its own way. For this analysis, only the regular version data for both products was used and the lite version data was omitted from the analysis. As can be seen from the scatter chart, most of the observations for Brand X lie in congruence to its total variable cost. There are only a few observations which lie at a distance from the linear chart for the total variable cost. The two variables that have been selected for the analysis here are the total variable cost and the total amount of Brand X. This shows that the parameter exists which systematically increments the TVC. This also shows that the concept of marginal cost increasing with every increase in the amount produced has also been validated.
For the next task, two regression analysis were conducted for both the brand x and brand y. The purpose of regression analysis is to judge whether the relationship between two variables or more exists and to what degree do both influence each other. Typically in this analysis, there is a dependent variable and the independent variable. The dependent variable gets influenced by the independent and thus its value varies with variations in the independent variable. The regression analysis here shows that there is a positive correlation between the TVC and the amount of the brand x and brand y. The values of predicted TVC for both brands also lie on the same linear curve as the original values. This shows that the observations have been validated and that the results are reliable.
The values of the coefficients that are computed as a part of the regression analysis indicate what kind of relationship exists between the two variables. In the case of brand X, it can be said that there is a positive relationship between the two variables which means that a positive increase in one would result in a positive increase in the other, as well. Also, a reduction in one would cause a reduction in the value of the other variable, as well. As per the calculations, a difference of almost 0.017 would occur every time one extra unit of brand x is sold or produced. In the case of brand Y as well the study shows that there is a positive relationship between the two variables. This means that an increase in the value of one would result in an increase in the value of the other variable, as well. On the basis of this study it can be said that every time there is an increase in the number of commodities sold of either brand, the total variable cost would be an increase proportionately.
For the next job, a second regression analysis was conducted in which the average quantities of both brands were calculated with relation to the promotion activities made for their sales. These sales figures were then analyzed with regard to the price and the frequency of the promotional activities. The results of both the regression analysis revealed significant relationships between the variables that were examined. A negative correlation between price and promotional activities revealed that the price is not significantly affected with the number of promotions made of any nature. However, with relation to the amount it was revealed that the number of promotional activities has a positive relationship with the sales. This shows that sales or the amount of the commodity gets affected by the promotional activities and the same results in an increase in the number of units sold. When the units sold were compared with the number of activities done for brand X as compared to the number of promotions made for brand Y, it showed a negative correlation which can be interpreted that if promotional activities are made for brand Y then sales for brand X reduce or drop. This stands truly from the perspective of business and markets as well as in the brand which is promoted and made popular by advertising and discounts would receive more attention from the customers.
Instances when there is no promotion for brand y shows that there is high demand for brand x. This means that as per the functions of economics, brand x would experience an increase in its sales figures since it would be purchased more by customers. When there are promotional activities for brand y, then the need for brand x would reduce since demand for brand y would increase. At such times, the sales of brand x would reduce, and the sales for brand y would increase.
In the next task, calculations with relation to brand x in two scenarios have been conducted. One can see from these calculations that the markup for both scenario's i.e. when there is no promotion for product Y and both promotions for product Y is the same. The 27% markup shows that the profit margin in both cases for the seller would remain the same.
For the next job, price and profit maximization functions have been worked out in different scenarios considering that there are three different types of price differential models which can be applied to this brand. The three price differentials are – first degree, second degree and third degree. As per the first degree price discrimination, it requires a monopoly seller to know the absolute maximum price which the consumers would be willing to pay. Since the seller has a monopoly, he would be able to sell at the maximum price and earn the highest profit margin possibly. In the second degree price discrimination, the price of the commodity varies according to the amount which is demanded. This means that if there is a higher demand for an amount, they would be available at a lower price whereas the commodities that have a lower market would be charged more. In the third level of price discrimination, price is changed and varied as per different attributes such as location or market segment etc.
In the next task, analysis is made to examine the behavior of the economic functions in a third degree price discrimination situation. The same study is also conducted for second and first degree price discrimination scenarios subsequently. In every analysis, one can see that there is a change in the amount of the brands which would reveal the highest profit margin. This occurs because the constraints or the situations which govern the business, or in this case the sale of the products and the determination of the prices changes. The study shows the highest price at which the seller would be able to earn the highest level of profit. One should also observe that the revenue and all other economic factors change with the change in the conditions, and also the markup value changes under each scenario.
This analysis has revealed how price determination decisions are taken under different market conditions by producers and service providers. As market conditions differ, so does the manner in which producers decide which price would offer the maximum profit and which would also be acceptable by the consumer. This is an important function of economics and business since it shows how profitable a firm will be.