Ella Ltd recently started to manufacture and sell product DG. The variable cost of product DG is £4 per unit and the total weekly fixed costs are £18 000. The company has set the ini- tial selling price of product DG by adding a mark up of 40% to its total unit cost. It has
assumed that production and sales will be 3000 units per week. The company holds no stocks of product DG.
1 Calculate for product DG:
a the initial selling price per unit; and b the resultant weekly profit.
The management accountant has established that a linear relationship between the unit selling price (P in £) and the weekly demand (Q in units) for product DG is given by:
P = 20 – 0.002Q
The marginal revenue (MR in £ per unit) is related to weekly demand (Q in units) by the equation:
MR = 20 – 0.004Q
2 Calculate the selling price per unit for product DG that should be set in order to max- imise weekly profit.
3 Distinguish briefly between penetration and skimming pricing policies when launching a new product.
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