112 Understanding the Numbers
relevant cost analysis before granting any price concessions to customers on a
selective basis.
CVP in a Multiple Product Situation
The special order was a great opportunity, but both Abbey and Stephen knew
that the success of the Web site ultimately would depend on the regular, day-
to-day business activity. The two of them were still worried about the potential
Web discount resulting in a $70 price point. As an artist Abbey understood risk
and had learned long ago to accept risk and figure a way to minimize it. She de-
cided to talk with some of her artist friends.
In two weeks she and Stephen met again. Stephen was desperate to finish
his project since semester end was right around the corner. Abbey walked in
wearing a rather stylish straw hat.
“I think I have the solution, Stephen. I do not want to drop my price from
$80. My other books sold at this price, and to drop the price on this one might
send the wrong message to my loyal following. This book will not be in any
manner inferior to my past works. But I do have an idea. We are going to ex-
pand our product offerings. I have a dear friend who makes these hats, and I
think this would be a perfect complement to my bird book. After all, if you are
going out bird-watching in Florida you need both to look good and to have sun
protection. We are going to package the book with a hat and a Peterson’s
Florida Bird Guideat a very reasonable price for those that are more price
conscious.”
Stephen was stunned. “ Whoa, do you want all this complexity in your
business, Abbey?”
She smiled. “I, too, can do some field research. My friend will package
the three items as orders come in. I don’t have to do any more work than be-
fore. She was happy to build demand for her hats.”
“So, how about the costs?”
“This is how I see it. We sell the hats for $50 by themselves; the books for
$80 by themselves; and then offer the package for $140. A Peterson’s Guide
typically sells for $20, so this package price is a deal—you could say I’m selling
my book for $70 as part of this package, although I would never admit to it. I
coerced my friend to give us her hats for $24 each, and the book costs when in-
cluded in this package will change a bit. I put your relevant cost technique to
work here. My friend and I think we can assemble the package for a variable
cost of about $100 (see Exhibit 3.8). Peterson will give us the guide for $10 to
get the exposure, and since we are still shipping only one item, I’m hoping that
the logistics charge will not change too much. I had some problems figuring out
what we have to sell since there were now multiple items—hats, books, and
packages. But I have faith in you.”
As his laptop was booting Stephen began. “CVP analysis for multiple
products is very common since few companies sell just one item. Instead of