Profit Planning Under Price Controls

In September 1973, the Cost of Living Council (CLC) introduced price controls with a view of controlling profit margins of corporations. Under Phase IV-B as the rulings were called, Booth Fisheries was required to monitor profit margins within defined product groups. The size and composition of these groups were at the discretion of Booth Fisheries as long as they had some reasonable basis, but the profit margins of each group for each fiscal quarter was fixed, based on the previous year's margin.Initially, the relationship between product group structure and the total gross profit was not apparent. The task as perceived by management was one of merely modifying the Sales reporting system to help monitor and control the margins within existing product groups. However, the operations research group realized that total gross profit could in fact be increased by restructuring the groups.The operations research group studied the problem, mathematically formulated it, and developed a unique algorithm to obtain optimum product groups. The suggested groupings had a substantial impact on the earnings performance of the company. The benefits were directly measurable and amounted to an increase of 12% in gross profit over the traditional group structure. The groupings also provided Marketing with the desired price flexibiity in certain products.Due to the time constraint imposed by CLC requirements, the entire project was completed in three weeks.