LogCo Rail Freight: Pricing and Profit Maximization Case Study

This case study analyzes LogCo, a rail freight company, and its pricing strategies for transporting grains. The analysis begins with the construction of a demand curve and determination of the price needed to maximize profit, considering negligible marginal costs and fixed costs. The solution calculates the minimum price required to cover costs, considering variable costs and potential losses. The study further explores the impact of a competitor, Northern inner waterways, and discusses pricing adjustments if the companies were to merge. A discount structure is proposed to reflect volume-based pricing, and the impact of changing volumes on the demand curve and pricing is examined. References include sources on profit maximization and discount pricing strategies.

Business Solution
Student Name
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1.Demand curve
The demand curve is a straight line as the price per unit does not change irrespective of the
tonnage being transported on the rail.
Demand curve.
Pric
e
Quantit
y
2. To maximize profit, LogCo must set its price where the marginal cost is equal to marginal
revenue. In our case the marginal revenue and cost are negligible as the price does not
change. The cost of an extra haulage does not change as trains run on schedule irrespective
of the demand
Calculation
a. Variable cost
Unit Amount
Demand 700
Average cost $ 15,00
Variable Cost =(Demand*Average cost) $ 10 500,00
b. Cost of loss of grain
%Loss o grain on rail transport 1%
Demand (tonnage transported) 700
Total loss value*$1000 per tonne 7 000,00
Total Variable Cost=(Loss on transport+ variable cost) 17 500,00
As Total cost=fixed costs + variable costs.
If we assume fixed cost is 0, then the total cost is assumed to be the variable cost.
The minimum revenue that can sustain this business is price that can cover our costs.
So we divide our cost by demand to get the minimum price that can be charged.
Total cost /demand (17,500/700)= to get $25.

Any price above $25 will lead to profit maximization
3.If Norther inner waterways Miritituba-Barcarena were to take over the freight for Company
C or any profitable routes, the price would not change as the marginal costs are minimal.
Reduction in volumes will therefor not have significant impact on operations of LogCo.
The waterways will of course respond to pricing and if the prices by LogCo will lead to
business being directed to LogCo then there might be a price war. They may lead to overall
reduction in prices until it will not be profitable to either party.
4. With the companies operating as one company, I would have to change my pricing to
reflect the quantity availed for transport. Given that there is competition in the market, I
would have structured pricing to reflect the quantity of the grain sent for freight. I would tier
my pricing such that higher volumes will attract a lower price per tonne. This may attract
more volumes which will translate to more revenue. The marginal cost is very low hence
additional freight will translate to more net revenue. However, the price for the lower
quantities must be higher. The revenue should cover all the cost of running the whole
business.
5. The discount structure would look like this.
Discount Structure
Quantity Discount
Discounted
Price
0-x 0 P
>x D1 (P-D1)
>y D2 (P-D2)

Scenario 3.
If the volumes change, the following changes will happen in my earlier answers.
Number 1. The demand curve will now shift to that of a lower price leading to higher
demand. Higher volumes are attracting a lower cost per unit.
Demand curve.
Pric
e
P
P-
D1
P-
D2
X Y
Deman
d
Number 2. This will be dictated by the discount structure in place.
Number 3. The waterways would respond by reducing the price further down as a natural
reaction to competitor moves.

References.
Pettinger, T. (2016). Profit Maximisation - Economics Help. [online] Economics Help.
Available at: https://www.economicshelp.org/blog/3201/economics/profit-maximisation/.
Roque, C. (2017). How to Use Discount Pricing Strategies to Make More Sales. [online]
Business Envato Tuts+. Available at: https://business.tutsplus.com/tutorials/how-to-use-
discount-pricing-strategies--cms-28611.