Create an Account

Already have account?

Forgot Your Password ?

Home / Questions / Computation of minimum selling price and optimum price from price demand relationships In...

Computation of minimum selling price and optimum price from price demand relationships In an attempt to win over key customers in the motor industry and to increase its market share

Computation of minimum selling price and optimum price from price—demand relationships

In an attempt to win over key customers in the motor industry and to increase its market share, BIL Motor Components plc has decided to charge a price lower than its normal price for component TD463 when selling to the key customers who are being targeted. Details of component TD463's standard costs are as follows:

 

 

Component TD463

 

 

 

Batch size 200 units

 

 

Machine

Machine

Machine

Assembly

 

Group1

Group 7

Group 29

 

 

(£)

(£)

(£)

(£)

Materials (per unit)

26.00

17.00

 

3.00

Labour (per unit)

2.00

1.60

0.75

1.20

Variable overheads (per unit)

0.65

0.72

0.80

0.36

Fixed overheads

 

 

 

 

(per unit)

3.00

.-2.50

1.50

0.84

 

31.65

21.82

3.05

5.40

Setting-up costs per batch of 200 units

£10.00

£6.00

£4.00

 

Required:

(a) Compute the lowest selling price at which one batch of 200 units could be offered, and critically evaluate the adoption of such a pricing policy.

(b) The company is also considering the launch of a new product, component TDX489, and has provided you with the following information:

 

Standard cost per box

 

(£)

Variable cost

6.20

Fixed cost

1.60

 

7.80

Market research forecast of demand:

Selling price (£)

13

12

11

10

9

Demand (boxes)

5000

6000

7200

11200

13400

The company only has enough production capacity to make 7000 boxes. However, it would be possible to purchase product TDX489 from a subcontractor at £7.75 per box for orders up to 5000 boxes and £7 per box if the orders exceed 5000 boxes.

Required:

Prepare and present a computation which illustrates which price should be selected in order to maximise profits.

(c) Where production capacity is the 'limiting factor', explain briefly the ways in which management can increase it without having to acquire more plant and machinery.

Jun 18 2020 View more View Less

Answer (Solved)

question Subscribe To Get Solution

Related Questions