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Consider a Scandinavian wind turbine manufacturer attempting to understand the profit impact of a price change on turbines. Currently, a 1.5-megawatt (MW) wind turbine has a total price of $1.7 million to an electric generator but faces only a $1.3 million in marginal cost to deliver. The Scandinavian wind turbine manufacturer has a 35 percent market share.
a. What is the initial contribution margin?
b. If the wind turbine manufacturer considered dropping the price by 3 percent, what would be the new price, and what volume hurdle must be cleared for the price change to improve profits?
c. If the wind turbine manufacturer considered raising the price by 3 percent, what would be the new price, and what would be the allowable volume loss for the price change to improve profits?
d. Discussion Question: A U.S. competitor sells comparable wind turbines for $1,675,000 and has 25 percent market share. Given this information, should the Scandinavian wind turbine manufacturer raise or lower prices by 3 percent? What is the reasoning behind your suggestion?
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