Page 8 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

This means that rather than raising prices to cover average passenger loads, Menta has chosen to
try and undercut competitors to gain market share.

Menta has also been shown to adopt a penetration pricing strategy to try and force smaller
competitors, such as Jaria buses, out of the market. By adopting an aggressively low price policy
(that may not actually be generating profit) that these small companies cannot match, Menta has
gained market share and then once the competitor has left the market, it has raised its prices to
make the route profitable.

Inter‐city pricing

Here, Menta makes use of the different elasticities of demand for this service over time and
during different hours of the day.

Menta charges lower fares for advance passengers and higher ones for those who buy last
minute. This is because the elasticity of demand is higher for those who book in advance and
have the time to scout around for the best prices. Those who book last minute will not have this
flexibility to spend time looking for the best deal and so demand here will be less elastic, meaning
Menta can charge higher prices.

Elasticity of demand for those who travel at popular times will be lower than those who travel in
less popular ones. The convenience of travelling in the morning will outweigh the extra cost of
the higher fare and people will still pay the higher fare to gain that convenience. A lower price in
less popular times may attract people who would otherwise use a different method of travel.

By taking account of the different elasticities of demand, Menta is able to charge higher prices
where it can to earn more cash.

3. BREAK‐EVEN ANALYSIS

The break‐even point is that of zero profit. Break‐even analysis can be used by companies to
determine minimum levels of production / sales that will enable them to avoid making a loss.

The normal calculation to calculate a break‐even point is to take the fixed costs of the business
and divide them by the contribution per unit. This will calculate the number of units that need to
be sold in order to exactly cover those fixed costs with the contribution earned.

Any units sold in addition to this number will be the ones that enable the business to earn a profit.

Menta has calculated a break‐even position in relation to the route types that it runs. Instead of
calculating a number of routes that must be undertaken it has determined the break‐even
average number of passengers that the route must hold in order to break‐even.
Approximately 70% of Menta’s operating costs vary with distance travelled, but they do not vary
much with passenger numbers, so Menta has calculated a cost per kilometre for each route type
and has then considered different fares per kilometre to compare against. This has then allowed
them to determine how many passengers would be needed, each bringing in a fare, to cover the
fixed cost per kilometre.

52 KAPLAN PUBLISHING