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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:
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Component TD463 |
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Batch size 200 units |
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|
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Machine |
Machine |
Machine |
Assembly |
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Group1 |
Group 7 |
Group 29 |
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(£) |
(£) |
(£) |
(£) |
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Materials (per unit) |
26.00 |
17.00 |
|
3.00 |
|
Labour (per unit) |
2.00 |
1.60 |
0.75 |
1.20 |
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Variable overheads (per unit) |
0.65 |
0.72 |
0.80 |
0.36 |
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Fixed overheads |
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|
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(per unit) |
3.00 |
.-2.50 |
1.50 |
0.84 |
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|
31.65 |
21.82 |
3.05 |
5.40 |
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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:
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Standard cost per box |
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(£) |
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Variable cost |
6.20 |
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Fixed cost |
1.60 |
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7.80 |
Market research forecast of demand:
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Selling price (£) |
13 |
12 |
11 |
10 |
9 |
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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.
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