High School

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**Conditioner Parts Inc.**

You have been appointed as the manager of a division that sells replacement parts for air conditioners to wholesalers. The division has been losing money over the last two years, and your mandate is to turn the situation around quickly.

You decide to examine all aspects of the division's performance. You appoint five members to a pricing committee and ask them to recommend a procedure for reviewing the pricing decisions for major parts sold by the division. The committee is to report back in two weeks so that a comprehensive review of the pricing of all parts can begin.

**Recommended Methodology:**

The committee uses part 1006 to illustrate the recommended procedure:

1. **Review Past Pricing History:** Determine when the price changed. The price history of part 1006 reveals the price was $20 per unit until April 1, 1993, when it increased by 50% to $30.

2. **Assemble Monthly Sales Data:** Determine how the quantity sold responded to the price change. The sales history of part 1006 from 1992 to 1995 is shown in the accompanying table.

3. **Calculate Price Elasticity of Demand:** The committee cannot agree on how to implement the procedure. They disagree about which quantity data should be used to calculate the price elasticity. Two different proposals are being considered:

- **Proposal 1:** Three members suggest that the price elasticity should be calculated by comparing average sales during the six months before the price increase with average sales during the first six months after the price increase. They argue that figures for less than six months may contain too many random effects that will distort the price elasticity estimates. If data for more than six months are used, they are concerned that the assumption that other variables are constant will be violated.

- **Proposal 2:** Two members recommend that average sales 12 months before the price increase be compared with average sales for the 12 months after the price increase.

Please review and provide feedback on the proposed methodologies.

Answer :

They propose a methodology that involves reviewing the past pricing history, assembling monthly sales data, and calculating the price elasticity of demand.

The pricing committee members in Conditioner Parts Inc. are tasked with recommending a procedure for reviewing the pricing decisions for major parts sold by the division. They propose a methodology that involves reviewing the past pricing history, assembling monthly sales data, and calculating the price elasticity of demand.

However, they are divided on which quantity data should be used to calculate the price elasticity.

Proposal 1 suggests using the average sales during the six months before the price increase compared to the average sales during the first six months after the price increase. This approach aims to minimize the impact of random effects and assumes that other variables remain constant. It focuses on the immediate response to the price change.

Proposal 2, on the other hand, recommends comparing average sales 12 months before the price increase with average sales for the 12 months after the price increase. This approach considers a longer time period and aims to capture the sustained impact of the price change on sales. It provides a broader perspective on the price elasticity of demand.

The committee members have different opinions on which proposal to adopt, and their disagreement centers around the time frame and the potential impact of other variables on sales. It is important for the committee to carefully evaluate both proposals and consider the specific context of the industry, market conditions, and any other relevant factors before making a decision.

Ultimately, the chosen approach will affect the accuracy of the price elasticity estimates and, consequently, the pricing decisions made by the division. The committee needs to reach a consensus on the methodology to ensure a comprehensive and reliable review of pricing for all parts sold by the division.

Learn more about price elasticity of demand from the given link:

brainly.com/question/5078326

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