Pricing

Elektra Electronics Company is a business division of a mid-sized company focused on manufacturing and selling a high quality consumer electronic device through high-end marketing channels such as specialty shops and exclusive department stores. These specialty outlets advise and educate customers about the desirable features of different electronic devices. Elektra charges on average 500 per unit to its distributors, who mark it up to 899 when selling to retail customers. After many years of high sales, Elektras sales in the last year had slumped to 150,000 units per year using only 75 of its manufacturing capacity. The decline in demand was because of fast changing technologies and consumer habits, and the recent introduction of a new generation of the electronic device had not increased sales appreciably. Consequently, Elektras senior management believes it is unlikely that the demand for its products will increase significantly in the next three years until conditions improve substantially and Elektra and its high-end competitors introduce the next generation technology. Nonetheless, they remained confident about the long term prospects of their product. Elektra has recently received a proposal from MegaMart Stores, Inc., a leading national chain of discount retail stores. MegaMart wants to buy Elektras product of the same quality as that sold at present through specialty retailers. MegaMart has offered to purchase 50,000 units annually for a three-year period at 374 per unit. It cannot pay a higher price because it plans to retail the product at only 549. While costs are not expected to increase, an inflation clause will allow Elektra to pass on exogenous cost increases. After extensive negotiations, MegaMart has made a take-it-or-leave-it offer and threatened to explore other strategic partners in case Elektra does not accept its offer. Although MegaMarts offer is 25 below Elektras normal price, it may be attractive for Elektra to be an early mover in the