Cumberland Metal Industries

Introduction
Cumberland Metal Industries is one of the largest manufacturers of curled metal products by
the year 1980. CMI is about to introduce a new product, a cushion pad for driving piles, that
could double the sales, as well as compensate for the decline of some existing lines. Setting
the price is the main challenge because of its impact on sales and earnings.

Setting the price

To determine the total economic exchange value, the reference value and the differential
value have to be identified.
For that we take a look at the value of the nearest comparable alternative, the asbestos pad
with the help of the Colerick Test. On the basis of the job requiring 300 piles, driven 50 feet
into the ground, 480 asbestos pads were used (Page 3). The costs for a typical 11 inch pad
set is at 50$. So asbestos pads worth 1000$ were used.
In contrast only 6 pads (=1set) of CMI were required. Hence the reference price for the new
CMI pad is at 166,67$ for each.

20 sets 24 pads=480 pad s

20 sets 50 =1000

1000 $
=166,67 $
6 pads

In the next step we have to identify all factors that

differentiate the new product from the asbestos pad.
Obviously the CMI pad lasts about 80 times longer than the asbestos one, but we already
mentioned that advantage at the reference value.
To have a look at the speed factor we see that CMIs pads work faster and that there are even
less in need. Using the CMI pads 200 feet per hour can be driven (with asbestos only 150)
what makes them 33% faster and beyond that there is no time for set changes required.
To do the job with asbestos pads, 400 minutes were needed.

20 set changes 20 min=400 min

All in all 15000 feet were driven into the ground. Using the asbestos pads with it took them
6000 minutes to do the task. To sum this up it took about 6400minutes (400+ 6000) to end
the job.

300 piles 50 feet =15000 fee t

15000 feet
=100 hours=6000 minutes
150 feet / hour

In contrast the CMI pads only required 4 minutes for one set change. Here also 15000 feet
were driven into the ground. But using CMI pads, it only took 75 hours matching 4500
minutes.

15000 feet
=75 hours=4500
4 min+4500 min=4504
minutes minute s
200 feet /hour

That makes a total work time of 4504

minutes (Page3).
Compared to the asbestos pads, using CMIs pads would save 1896 minutes or 31,6 hours.

6000 min4504 min=1896 minutes

31,6 hours

Assuming that customers rent the equipment for pile driving for 138$ per hour including costs
for labor, cranes and diesel hammer, they could save 4360,80$ by using 6 pads made by
Cumberland Metal Industries (Page 4).

31,6 hours 138 $=4360,80 $

4360,80 $
=726,80 $
6 pads

166,67 $ +726,8 $=893,47 $

That leads to a differential value of 726,8$ per pad.

Consequentially the total economic exchange value is 893.47$
There is even a Fazio- test to determine the exchange value of the CMI pad. The proceeding
is the same as at the Colerick Test but thereby a higher exchange value of 1272,44$ became
the result. That leads from a higher reference value of 400$ and a higher differential value of
872,44$.
Accordingly the exchange value is higher than the result of the Colerick Test.
The management expects a contribution margin of at least 40% of selling price.
Supposed that CMI purchases permanent tooling for the 11 inch pads for 50000$, the
marginal manufacturing costs would be at 69,18$ (Page 8).
Adding the margin of 40% of selling price, the bottom border price would be 115,30$.

Conclusion
Regarding to the points already mentioned, the price should be between 115,30$ and 893,47$
or 1272,44$.
But to take a conservative view on it, 893,47$ should be taken as ceiling price. If customers
would know about both exchange prices, they would not be willing to buy the more expensive
one.
Considering the price for an asbestos pad set, which is at 50$, the market price should
actually be near 115,30$. New customers could be shocked by the high price. To persuade
them to buy CMIs pads, good marketing tools and distribution canals will be necessary.
But that would be expensive, too. By this, all advantages even those non-monetary ones like
health or the weight, can be communicated and the real value of the revolutionary product
can be delivered to the costumer.
At the beginning everyone should get a discount of 15% to lower the barrier in mind and after
the first sales phase, a price of 350$ should be adjusted to cover the costs of all marketing
strategies and side costs.
Beside that there is a great market potential of 172.500 pads per year (page 6).

345 Mio.

feet
feet
( year
) 2000( pads
)=172, 500 ( pads
year )

In contrast CMI only has a current capacity of 3000 pads per year. So there is no need to
worry. If the price was too high it could immediately be lowered to supply the customers with
pads without having the risk, that there would be no market potential anymore.
On the contrary CMI should enlarge its capacities to increase its market share in the future.
All this will only be able to work under the assumption that the new pad would be patentprojected. This would keep competitors outside the market and a great market share would
be the result.
Of course there are companies who own their own equipment. Thus, a lower price as a result
of a lower differentiate value ,would be required.
It could even be a possibility to set a different price to each target group.
But to set one fixed price, 350$ per pad should be a good solution.

Alexander Klocke