1. Should Beauregard Textile Company announce a price of $3.

00 or
$4.00 per yard for Triaxx-30?
2. What are the financial results for Beauregard Textile Company that
Beal and Calloway should be looking at with respect to the present
pricing arrangement?
3. How would the numbers look if Beauregard dropped its price to
$3.00?
4. Calhoun and Pritchard presumably is showing a loss at $3.00. Why
then is it not raising its price? What happens to Calhoun and
Pritchard if Beauregard drops its price to $3.00?

Problem Identification
Beauregard is a textile company with annual sales of about $82 million making it one of the largest firms
in its segment. Currently, due to recent increase in costs the price of Triaxx-30, a fabric manufactured by
BTC, has been increased from $3 to $4. The current supplier market for Triaxx-30 (T30) is a duopoly with
Calhoun & Pritchard Inc. as the only other supplier.
Since C & P have retained their price of $3 BTC has lost its market share. The current problem faced by
the BTC executives is whether to reduce the price back to $3 so as to regain market or to remain at $4 in
order to maintain profits.
Situation Analysis
Traditionally BTC owned close to 56% of the market share for Triaxx-30, while C & P owned 44% of it.
Due to the increase in costs incurred by BTC they were forced to increase their price from $3 to $4. The
customers being price sensitive immediately shifted towards C & P which resulted in loss of market
share for BTC. Now BTC has 33% of the market share while C & P has 66%.
C & P generally waits for BTC to announce their price list before publishing their own price list so as to
remain at par with the competition. But when BTC increased their price C&P refused to follow suit and
maintained their price level. Since the market is inherently price sensitive it is estimated that the market
size will shrink by 20% if both suppliers increase their price levels.
Analysis of alternatives
The 3 available alternatives are
1. Maintain Status Quo, ie, BTC prices at $4 while C & P prices at $3. In this scenario C & P enjoys major
market share while not making good profit margins where as BTC while losing their market share they
are able to cover their costs and claim profits through higher price. This also doesnt result in shrinkage
of the market size
2. BTC reduces its price to $3. In this scenario BTC will mostly regain their market share but may not be
able to cover their costs through the price. There is no loss of market size in this scenario.
3. C & P raises their price to $4. This will result in market shrinkage by 20% . Both players will enjoy
greater profit margins in this scenario. But both players raising their prices simultaneously may be
regarded as collusion and deemed illegal.
Cost Analysis
The relevant costs to be considered while calculating the contribution to profits of T-30 are
Direct Labor
Material.
Material Spoilage.
Direct Department Expense
Expenses that are not related to the scale of production of T-30 can be excluded. Also the expenses that
have been allocated to cover costs which are common to other items can be excluded.
Following 1st Alternative
From Exhibit 2 we find that at production level of 75,000 units the relevant costs for BTC are:-
Direct Labour $0.80
Material $0.40
Material Spoilage $0.04
Direct Dept Exp $0.12
Total Relevant cost $1.36
Price $4
Contribution $2.64
Total contribution = 75000*2.64= $198,000
For C & P corresponding production =150,000
Direct Labour $0.74
Material $0.40
Material Spoilage $0.038
Direct Dept Exp $0.1
Total Relevant cost $1.278
Price $3
Contribution $1.722
Total Contribution $258,300
Following 2nd Alternative
From Exhibit 2 we find that at production level of 125,000 units the relevant costs for BTC are:-
Direct Labour $0.76
Material $0.40
Material Spoilage $0.038
Direct Dept Exp $0.1
Total Relevant cost $1.298
Price $3
Contribution $1.70
Total contribution = 125000*1.70= $212,750
For C & P corresponding production =100,000
Direct Labour $0.78
Material $0.40
Material Spoilage $0.040
Direct Dept Exp $0.112
Total Relevant cost $1.332
Price $3
Contribution $1.67
Total Contribution $166,800
Following 3rd Alternative
Due to 20% shrinkage of market size the production level of BTC will be 100,000. Corresponding relevant
costs for BTC are:-
Direct Labour $0.780
Material $0.40
Material Spoilage $0.04
Direct Dept Exp $0.112
Total Relevant cost $1.332
Price $4
Contribution $2.67
Total contribution = 100,000*2.67= $266,800
C & P corresponding production =80,000
Direct Labour $0.8
Material $0.40
Material Spoilage $0.040
Direct Dept Exp $0.112
Total Relevant cost $1.352
Price $4
Contribution $2.648
Total Contribution 80,000*2.648=211,840
Conclusion
From the analysis we find that the combined profit of the firms is maximum when both firms go for a
price of $4. This may be regarded as collusion because the firms are required to set their prices
independently and a simultaneous rise in prices may lead to legal action.
Moreover, we see that C&P obtains maximum profits when it lists a price of $3 and BTC prices at $4.
Hence it is highly unlikely that C&P increase their price to $4. So, in-order to increase the overall
contribution BTC should reduce their price to $3.