Video Cases

Note: Please do not try to access these cases if you are using a connection at your home, unless you have a Broadband connection.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif:: ::/sites/dl/free/qutmrkting/89179/video.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Washburn 1 (420.0K)

VIDEO CASE 10-1 Washburn International: Guitars and Break-Even Points

"The relationship between musicians and their guitars is something really extraordinary-and is a fairly strange one," says Brady Breen in a carefully understated tone of voice. Breen has the experience to know. He's production manager of Washburn International, one of the most prestigious guitar manufacturers in the world. Washburn's instruments range from one-of-a-kind, custom-made acoustic and electric guitars and basses to less-expensive, mass-produced ones.

THE COMPANY The modern Washburn International started in 1977 when a small Chicago firm bought the century-old Washburn brand name and a small inventory of guitars, parts, and promotional supplies. At that time annual revenues of the company were $300,000 for the sale of about 2,500 guitars. Washburn's first catalog, appearing in 1978, told a frightening truth:

Our designs are translated by Japan's most experienced craftsmen, assuring the consistent quality and craftmanship for which they are known.

At that time the American guitar-making craft was at an all-time low. Guitars made by Japanese firms such as Ibane and Yamaha were in use by an increasing number of professionals.

Times have changed for Washburn. Today the company sells about 250,000 guitars a year. Annual sales exceed $50 million. All this resulted from Washburn's aggressive marketing strategies to develop product lines with different price points targeted at musicians in distinctly different market segments.

THE PRODUCTS AND MARKET SEGMENTS Arguably the most trendsetting guitar developed by the modern Washburn company appeared in 1980. This was the Festival Series of cutaway, thin-bodied flattops, with built-in bridge pickups and controls, which went on to become the virtual standard for live performances. John Lodge of the Moody Blues endorsed the 12-string version-his gleaming white guitar appearing in both concerts and ads for years. In the time since the Festival Series appeared, countless rock and country stars have used these instruments including Bob Dylan, Dolly Parton, Greg Allman, John Jorgenson, and George Harrison.

Until 1991 all Washburn guitars were manufactured in Asia. That year Washburn started building its high-end guitars in the United States. Today Washburn marketing executives divide its product line into four levels. From high end to low end these are:

One-of-a-kind, custom units.
Batch-custom units.
Mass-customized units.
Mass-produced units.

The one-of-a-kind custom units are for the many stars that use Washburn instruments. The mass-produced units targeted at first-time buyers are still manufactured in Asian factories.

PRICING ISSUES Setting prices for its various lines presents a continuing challenge for Washburn. Not only do the prices have to reflect the changing tastes of its various segments of musicians, but the prices must also be competitive with the prices set for guitars manufactured and marketed globally. In fact, Washburn and other well-known guitar manufacturers have a prestige-niche strategy. For Washburn this involves endorsements by internationally known musicians who play its instruments and lend their names to lines of Washburn signature guitars. This has the effect of reducing the price elasticity or price sensitivity for these guitars. Stars playing Washburn guitars like Nuno Bettencourt, David Gilmour of Pink Floyd, Joe Perry of Aerosmith, and Darryl Jones of the Rolling Stones have their own lines of signature guitars-the "batch-custom" units mentioned earlier.

Joe Baksha, Washburn's executive vice president, is responsible for reviewing and approving prices for the company's lines of guitars. Setting a sales target of 2,000 units for a new line of guitars, he is considering a suggested retail price of $329 per unit for customers at one of the hundreds of retail outlets carrying the Washburn line. For planning purposes, Baksha estimates half of the final retail price will be the price Washburn nets when it sells its guitar to the wholesalers and dealers in its channel of distribution.

Looking at Washburn's financial data for its present Chicago plant, Baksha estimates that this line of guitars must bear these fixed costs:

Rent and taxes 5 $12,000
Depreciation of equipment 5 $ 4,000
Management and quality control program 5 $20,000
In addition, he estimates the variable costs for each unit to be:
Direct materials 5 $25/unit
Direct labor 5 8 hours/unit @ $14/hour

Carefully kept production records at Washburn's Chicago plant make Baksha believe that these are reasonable estimates. He explains, "Before we begin a production run, we have a good feel for what our costs will be. The U.S.-built N-4, for example, simply costs more than one of our foreign-produced Mercury or Wing series electrics."

Caught in the global competition for guitar sales, Washburn searches for ways to reduce and control costs. After much agonizing, the company decided to move to Nashville, Tennessee. In this home of country music, Washburn expects to lower its manufacturing costs because there are many skilled workers in the region, and its fixed costs will be reduced by avoiding some of the expenses of having a big city location. Specifically, Washburn projects that it will reduce its rent and taxes expense by 40 percent and the wage rate it pays by 15 percent in relocating from Chicago to Nashville.

Questions

What factors are most likely to affect the demand for the lines of Washburn guitars (a) bought by a first-time guitar buyer and (b) bought by a sophisticated musician who wants a signature model signed by David Gilmour or Joe Perry?
For Washburn what are examples of (a) shifting the demand curve to the right to get a higher price for a guitar line (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve?
In Washburn's Chicago plant what is the break-even point for the new line of guitars if the retail price is (a) $329, (b) $359, and (c) $299? Also, (d) if Washburn achieves the sales target of 2,000 units at the $329 retail price, what will its profit be?
Assume that Washburn moves its production to Nashville and that the costs are reduced as projected in the case. Then, what will be the (a) new break-even point at a $329 retail price for this line of guitars and (b) the new profit if it sells 2,000 units?
If for competitive reasons, Washburn eventually has to move all its production back to Asia, (a) which specific costs might be lowered and (b) what additional costs might it expect to incur?

2003 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Policy.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.