Costing and Pricing Strategies for the Shetland Wool Company

Costing and pricing analysis

Both tasks must be submitted by the 24th January 2022. The tasks are individual pieces of work based on your own research.The Shetland Wool Company is a small family-owned company that produces very high-quality hand knitted wool sweaters. It uses a relatively small number of casual employees who produce the garments in their own homes. These are then sold in small numbers to exclusive outlets. The current performance of the business is not good and the Directors have looked in some detail at the cost base. They have established the following information;

•    The average cost of the wool used in a garment is £28.50
•    The labour involved in producing a sweater is on average 30 hours
•    Casual labour currently costs £5.50 per hour; however, the Directors feel that in order to maintain staff they will have to increase this next year by at least 5%
•    The transportation costs involved in producing the sweaters together with the cost of delivery amount to £4.50 per sweater.

In addition to the above costs the company also runs a Head Office which costs £100,000 per year. The Directors require total salaries of £125,000 and each year they award themselves a 5% pay increase. The level of advertising is an issue on which the Directors do not agree. This year advertising spend is £115,000. Next year the Sales Director would like to advertise in airline magazines, he believes that this would increase sales from this year’s forecast of 2,000 sweaters.

He estimates that if the advertising budget is increased to £285,000 then sales would increase to 5,000 sweaters. The Finance Director feels that this is not realistic and at the last Board meeting said "whatever we spend on that advertising thing we will never ever sell more than 3,000 sweaters". The Sales Director replied by saying "if we sold sweaters at £200 each, I could make annual sales of 10,000".

It is difficult to make a direct comparison of competing products. However high-quality knitted sweaters sell for between £200 and £400. The Shetland Wool Company has always assumed that the market is not particularly price sensitive and their reputation is for very high-quality garments.

The company's current pricing policy is not very clear, in the past they have aimed for 200% of budgeted manufacturing costs at normal volumes. However, a friend of the Managing Director recently told her that this was not necessary. The friend said that all the company needed to concentrate on was its marginal costs. If it could keep these low and made sure that the selling price was a little bit higher the rest would all work out. 

Marginal costing vs. other costing methods

The Managing Director asks you for your help. You are required to write a report (1500 words) covering the costing and pricing issues set out above. In particular you should address the following;

1.    Is the Managing Directors friend right in suggesting that marginal costing is an appropriate way to control costs and set a selling price? You should illustrate your answer with relevant calculations.
2.    What other methods of costing might be appropriate? Your answer should be supported by appropriate theory.
3.    You are asked to suggest a selling price for both the current year and next year. You should justify your price on the basis of costing and pricing theory. You are also required to produce a break-even analysis to support your suggested selling price.

In particular, explore the UK market opportunities and trends, identify their potential customers and make recommendation on which target segments are most suitable, and suggest an implementation plans for the business to move forward. The report should have included the following:

•    The macro environmental factors: to attempt to indicate how this sector might develop.  (Both in the short and long term)

•    The micro environment actor: with a particular focus upon understanding the nature and basis of competition within the market and in attempting to identify viable market segments.  

•    Analysis potential target customers segments: consider various options with o a mix of factors including customer preferences, sector types, geographical location etc, you need to suggest various options for segmentation and evaluate different options, before you recommend which chosen customer segments are most suitable for the company. 

Note: whilst you may draw upon worldwide insights for the macro analysis, the micro analysis needs to concentrate upon the UK environment.

•    Then, taking one of the segments identified, undertake a viability analysis to gauge its future attractiveness / potential (or otherwise) over the next 5 years.  

•    The key financial data needed to do calculations against is supplied above, but ensure that you use this in line with the indicators gathered, e.g. market size, growth, etc, from the market data you gather.

•    You are required to make recommendation to suggest a marketing practice with implementation plan, including product and brand strategies, pricing strategies, the promotional and distribution strategies that you consider most appropriate for the target customer segments. 

•    Taking the data gathered, write this up as a report for companies interested in exploring this opportunity. You need to present both data and arguments/reasoning for the recommendations put forward. Be they to engage with or keep away from this market.  Ensure that this is fully referenced / underpinned.

•    When writing up this report, you need to demonstrate the degree to which the data you rely on to reach your conclusions is reliable.  Thus you need to include, as appropriate, any notes of caution or further research investigation that may be appropriate before any company acts upon your conclusion.