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AB p.l.c. makes two products, Alpha and Beta. The company made a £500 000 profit last year and proposes an identical plan for the coming year. The relevant data for last year are summarized in Table 1.
Table 1: Actuals for last year
|
|
Product |
Product |
|
|
Alpha |
Beta |
|
Actual production and sales (units) |
20000 |
40000 |
|
Total costs per unit |
£20 |
£40 |
|
Selling prices per unit (25% on cost) |
£25 |
£50 |
|
Machining time per unit (hours) |
2 |
1 |
|
Potential demand at above selling prices (units) |
30000 |
50000 |
Fixed costs were £480 000 for the year, absorbed on machining hours which were fully utilized for the production achieved.
A new Managing Director has been appointed and he is somewhat sceptical about the plan being proposed. Furthermore, he thinks that additional machining capacity should be installed to remove any production bottlenecks and wonders whether a more flexible pricing policy should be adopted.
Table 2 summarizes the changes in costs involved for the extra capacity and gives price/demand data, supplied by the Marketing Department, applicable to the conditions expected in the next period.
Table 2:
Costs
Extra machining capacity would increase fixed costs by 10% in total. Variable costs and machining times per unit would remain unchanged.
|
|
Product |
Product |
|
Price/demand data |
Alpha |
Beta |
|
Price range (per unit) |
£20-30 |
£45-55 |
|
Expected demand (000 units) |
45-15 |
70-30 |
You are required to
(a) calculate the plan to maximize profits for the coming year based on the data and selling prices in Table 1;
(b) comment on the pricing system for the existing plan used in Table 1.
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