Product Pricing Questions

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SIL is considering the pricing of one of its products. It has already carried out
some market research with the following results:

The quantity demanded at a price of T.shs 200,000 will be 2,000 units.

The quantity demanded will increase/decrease by 200 units every T.shs 100,000
decrease/increase in the selling price.

The marginal cost of each unit is T.shs 70,000.

Note: if selling price (p) = a – bx then marginal revenue = a – 2bx

Required:

Calculate the selling price that maximizes company profit.

- Updated: 26 Jul 20
- |
- Attempts: 179
- |
- Correct: 90

Mzalendo Company operates in an entirely special industry, however, it also produces to order, and carries no inventory.
Its weekly demand function is estimated by an economist to be:-

P = 168 - ¼ Q

Where:

P = the unit selling price in shillings.

Q = quantity of units sold per week.

The Company’s fixed costs amount to shs. 900 a week.

The Company’s accountant estimates the variable cost function to be:

Shs. (¼ Q^{2} + 8Q)

Required:

- Determine the price and quantity for maximum sales revenue.
- Determine the price and quantity for maximum profit.
- Determine the maximum revenue and maximum profit.

- Updated: 26 Jul 20
- |
- Attempts: 780
- |
- Correct: 516

GIL, a manufacturer wants to produce a new domestic product. The non-current
asset needed for production will cost T.shs 5,000 million, and working capital
requirements are estimated at T.shs 1,300 million.

The estimated annual sales volume is 50,000 units.
Variable production costs are T.shs 50,000 per unit.

Fixed production costs will be T.shs 600 million each year and annual fixed nonproduction costs will be T.shs 200 million.

Required:

- Calculate the selling price using:
- Full cost plus 30%
- Marginal cost plus 50%
- Pricing basing on target return on investment of 15% per year
- If actual sales are only 30,000 units and the selling price is set at full cost plus 25%, what will the profit be for the year?

- Updated: 26 Jul 20
- |
- Attempts: 516
- |
- Correct: 222

Albany has recently spent some time on researching and developing a new
product from which they are trying to establish a suitable price. Previously they
have used profit margin of 20% to set the selling price.

The standard cost per unit has been estimated as follows:

Particulars | Amount (TZS) |
---|---|

Direct materials: | |

---Material 1 (4 kgs at TZS 2,500/kg) | 10,000 |

---Material 2 (1 kg at TZS 7,000/kg) | 7,000 |

Direct labour (2 hours at TZS 6,500/hour) | 13,000 |

Fixed overheads (2 hours at TZS 3,500/hour) | 7,000 |

Required:

- Using the standard costs calculate standard selling price.
- Give two other pricing strategies that could be adopted and describe the impact of each one on the price of the product.

- Updated: 26 Jul 20
- |
- Attempts: 156
- |
- Correct: 32

ABC plc is about to launch a new product. Facilities will allow the company to
produce up to 20 units per week. The marketing department has estimated that
at a price of T.shs 8,000 no units will be sold, but for each T.shs 150 reduction in
price one additional unit per week will be sold.

Fixed costs associated with manufacture are expected to be T.shs 12,000 per
week. Variable costs are expected to be T.shs 4,000 per unit for each of the first 10
units; thereafter each unit will cost T.shs 400 more than the preceding one..

Required

Calculate the most profitable level of output per week for the new product.

- Updated: 26 Jul 20
- |
- Attempts: 231
- |
- Correct: 49

Wince Co produces branded watches. Based on their study of production costs
and demand curves, it has determined the following demand and cost functions:

P = 80,000 – 2,500X (demand units are in thousands)

C = 500X^{2} + 20,000X + 100,000 (cost figures are in thousands)

Required:

- Determine the level that maximizes sales revenue
- Determine the level that maximizes profit

- Updated: 26 Jul 20
- |
- Attempts: 921
- |
- Correct: 395

A firm has revenue function given by R=10Q where R=Gross Revenue and Q=Number
of Units Sold, Production Cost function is given by

C = 20,000+ 50(^{Q}⁄_{800})^{2}

Find:

- the total Profit function, and
- the number of Units (Q) to be sold to get the maximum Profit.

- Updated: 26 Jul 20
- |
- Attempts: 34
- |
- Correct: 13

Masumbuko is launching a new, innovative product onto the market and is trying to decide on the right launch price for the product. The product’s expected life is three years. Given the high level of costs which have been incurred in developing the product, Masumbuko wants to ensure that it sets its price at the right level and has therefore consulted a market research company to help it do this. The research, which relates to similar but not identical products launched by other companies, has revealed that at a price of T.shs 600 annual demand would be expected to be 25,000 units. However, for every T.shs 20 increase in selling price, demand would be expected to fall by 200 units and for every T.shs 20 decrease in selling price, demand would be expected to increase by 200 units. A forecast of the annual production costs which would be incurred by Masumbuko in relation to the new product are as follows:

Annual production (units) | 20,000 | 25,000 | 30,000 | 35,000 |
---|---|---|---|---|

T.shs | T.shs | T.shs | T.shs | |

Direct material | 2,400,000 | 3,000,000 | 3,600,000 | 4,200,000 |

Direct labour | 1,200,000 | 1,500,000 | 1,800,000 | 2,100,000 |

Overheads | 1,400,000 | 1,550,000 | 1,700,000 | 1,850,000 |

- Calculate the total variable cost per unit and total fixed overheads.
- Calculate the optimum (profit maximizing) selling price for the new product AND calculate the resulting profit for the period.

- Updated: 26 Jul 20
- |
- Attempts: 921
- |
- Correct: 395

Recently you have been employed at Engage Consult Company Ltd. The company has discovered the means of producing the new product. The Managing Director has requested that, you form a team together with marketing and production specialists to prepare a report on the feasibility of successfully marketing this new product.

Together, you have come with the two production processes having the following characteristics and cost functions: -

Production Process | Maximum capacity required in liters | Initial investment required | Cost function |
---|---|---|---|

A | 28,000 | 300,000 | Shs. 90,000/yr +7.75/liter |

B | 34,000 | 600,000 | Shs. 160,000/yr + 4.25/liter |

After a thorough investigation, the marketing specialist has determined a demand function for the new product which is approximately linear over the range of 20,000 to 30,000 liters as described below:

Where; P = price per liter and Q is the quantity demanded in thousand liters.

Your company has a cost of capital of 14%. This particular investment proposal is one of many attractive opportunities available at the company.
**Required:**

Determine which production process and at what level of production, price and profit should be chosen in order to maximize profit.

- Updated: 26 Jul 20
- |
- Attempts: 14
- |
- Correct: 3