Question 4 doesn't outline that it's a new product - slightly misleading to say it's penetration price if we aren't told they're new to the market i.e., trying to penetrate it to gain market share and then putting the price up.
Question 5 - presumably price discrimination and differential pricing are the same. I don't recall that being made clear in the lecture? By process of elimination we can arrive at the right answer but why is there two different terms? Do the other pricing strategies have other names that we don't know about?
Cheers
J
John MoffatTutor·
For both questions it is clear that the other choices are not correct and therefore only the remaining option is correct.
Although penetration pricing is often used when it is a new product, it does not have to be the case. Even with existing products a low price may be used for a period in order to try and gain market share.
V
Vik·
I see that previously this was raised as a question, but the response does not explain what the correct answer to Q2 is. The formula given is P = a + bQ, while the standard formula is P = a – bQ. How does the “–” turn into a “+”?
J
John MoffatTutor·
Because the value of b works out to be negative. To get a higher demand the price will have to fall (as explained in the free lectures) which means b will have to be negative. Have you watched all the lectures on this? :-)
S
Shanmugapriya·
Sir ,
In Question No 1
Total 26
Gross profit 20
So cost 100 , Profit 120
Total cost = 26
Profit
26*20/100 = 5.2
Selling price= 31.2 but How it coming 32.5
Kindly explain
J
John MoffatTutor·
The total cost is 26 per unit.
If the profit is 20% of the selling price, then the cost is 80% of the selling price.
Therefore the selling price is 26/80% =$32.50.
(and, of course, it checks. The profit is 32.50 - 26.00 = 6.50, and 20% x 32.50 = 6.50 :-) )
S
Shanmugapriya·
Thank you Sir
J
John MoffatTutor·
You are welcome :-)
B
Belhadadji·
Hi
Im not sure About Hi John- im not sure if i get this calculation a= 200+(.003*100,000) = 500 . Can you please explain?
J
John MoffatTutor·
multiply 100,000 by 0.002 and you get 300. Add it to 200 and you get 500 :-)
W
Wang·
regarding the question 3
I made a mistake in calculation in the equation MR=MC that
a-2bQ=8*Q.
my question is that if the marginal cost is always equal to variable cost?
J
John MoffatTutor·
Yes - marginal means variable :-)
P
Prashant·
Hi John- im not sure if i get this calculation a= 200+(.003*100,000) = 500 it should be 230. Can you please explain?
J
John MoffatTutor·
0.003 x 100,000 does not equal 30. It is equal to 300 !!
A
Alex·
Very tricky questions :D
R
roshni·
Why is Q4 penetration pricing & not Volume??
J
John MoffatTutor·
They are selling at a discount for a limited period in order to gain market share. Volume discount is where a discount is given just to those who buy large quantities, which is not the case here.
Have you watched our free lectures on this?
R
Ray·
The question specifies 'promotional campaign', wouldn't that also mean the products are sold in discounts possibly for larger quantities? From what I understood penetration pricing is to charge a low price initially to gain market share and then increase it later. Example: Introduction of Samsung smartphones into the market. On the other hand, a promotional campaign can be held anytime during the life cycle of the product right? In this case wouldn't volume discounting benefit as well?
J
John MoffatTutor·
The promotional campaign makes no mention of volumes. So whatever the quantity purchased there will be a discount. This can happen when there is a new product, but it can happen at any time in order to try and gain market share.
Have you watched my free lectures on this?
T
Tshotetsi·
how the answer be 31.2 when the question said the gross profit margin is 20% and not the net profit margin
K
KEVIN·
Messed up the easy 1. Question 4, got the rest correct. This is pure example of how an examiner can fool you with basic English, I got trapped. Read the questions properly before answering guys.
N
Natalie·
Sir, I also got wrong for Q.1, very confused about the % of cost-plus, mark up, and gross profit margin, can provide some hits for easy identify the equation?
And for the absorption costing, fixed overhead costs should be allocated to a product whether or not it was sold in the period, but why the overhead cost $5 is excluded here?
J
John MoffatTutor·
The overhead cost has not been excluded. The total cost is 10 + 8 + 3 + 5 = $26.
The gross profit margin is the profit as a % of the selling price. So for every $100 selling price, the profit is $20 and therefore the cost is $80. Putting it the other way round, for every $80 cost, the selling price is $100. Therefore for a cost of $26, the selling price must be 100/80 x $26.
(Mark-up is the profit as a % of the cost. You can find more examples of both the gross margin and the mark-up in the Paper FA lectures on "mark-ups and margins")
D
daisy·
I confused on Q3. Why MR=500-0.006X how to get the 0.006?
J
John MoffatTutor·
b = 30/1000 = 0.003
The formula provided for the marginal revenue contains 2b, and 2 x 0.003 = 0.006
Did you watch the free lectures before attempting the test?
A
Atika·
please can you explain it more. Thank you
J
John MoffatTutor·
But I have explained (and explain exactly how this is arrived at in the free lectures).
M
Mita·
question 2
Dear Sir,
I am a bit confused here. Price demand equation is P= a-bQ . Therefore the answer should be P=75-.0025Q and I have got it wrong. Could you please explain.
V
Vidhi Dhakan·
Ya same here mitiksha.i also have same doubt.
V
Vidhi Dhakan·
Ok I got it. This is my solution.
P = a - bq
So here I have to find first b= change in price/ change in qty
5/2000 = 0.0025
Next step is I have to find a so
P= a-bq
25 = a-(0.0025*20000)
a= 75
So therefore answer is p=75-0.0025q.
I hope u understand
J
John MoffatTutor·
Correct :-)
V
Vik·
Your answer does not make sense: the correct expression is
? = ? + ? ?, but your calculation shows a “?” instead of a “+”.
K
kissme4560·
this question are really good
G
Grace·
I just want to understand something. there are three ways
1. 100/80 * 26
2. 120/100 * 26
3. 26*100/20
like on absorption costing question about selling price,i got it wrong coz i am always confused when it comes to the three ways. like the way the questions are asked,how best can l know which one to use.?
J
John MoffatTutor·
Unless the question specifically says differently, a profit margin is the profit as a % of the sales. A mark-up is the profit as a % of the cost.
(It may help you to watch the Paper FA lectures on mark-ups and margins.)
G
Grace·
Thanks
T
Tori·
Thank you ! you explained it so well in that lecture
S
Sumaiya·
Hello Sir,
i hope you are well. One Qs; i do not understand why you did 100/80*26 Can you please explain?
thank you,
J
John MoffatTutor·
If the profit is 20% of the sales then the cost must be 80% of the sales. Therefore the sales must be the cost divided by 80% (which is the same as multiplying by 100/80).
S
SOLANKAR·
100percent
M
Mohammed Adnan·
Sir had a doubt regarding differential pricing and price discrimination.
Are both the same thing?
B
Brian·
Yes they are
A
anirudhpokharel·
Sir,
Isn't a penetration strategy used for relatively new products in an already established market? Isn't it a long term approach rather than a short term (2 weeks). I read it in another subject of mine that penetration pricing is used when the market is old but the product is new. Please clear my confusion. Because there are 2 major strategies for new products ( price skimming and market penetration), price skimming is a short term strategy to sell products at the higher price initially so as to take advantage of lack of competitors and new technology and recover the cost of production and profit as soon as possible. And market penetration is a long term strategy to sell below the present market price to get accepted by the consumers. Where did I understand wrong?
M
Mohammed Adnan·
The question you are talking about is question 4.
It totally depends on the company on how long they want to use the strategy according to market response and various factors.
But as in question 4 it is clearly given that it is given a promotional discount in hopes of increasing price in 2 weeks.
Hope i am able to clear your doubt.
Thank you
U
Urmil·
hey john just had one doubt, it is explained that in market penetration initially "prices" are kept very low so as to promote the product, here in the question 4 it is said "heavy discounts" are offered, but there is huge difference between keeping price low and giving high discounts. That question gives me slight confusion regarding this terms. please helps me with same.
J
John MoffatTutor·
Why do you say there is a huge difference? Giving big discounts initially means the cost will be low initially. Once they have penetrated the market they can stop giving the high discounts.
U
Urmil·
ok sir , i understood the same, thank you.
J
John MoffatTutor·
You are welcome :-)
N
Naomi·
hello sir
is product line pricing the same as differential pricing
N
Naomi·
please dont reply, i understand now
J
John MoffatTutor·
I am happy that you now understand :-)
J
John MoffatTutor·
afzair21: :-)
A
afzal·
100% yahhhoooooooooooooooo
A
alie2018·
Thanks for these questions. They're very helpful. Though I missed question 1 but I have learnt my mistake. Margin is the profit expressed as a % of selling price and mark-up is the profit expressed as a % of cost. Practice makes perfect when you attempt something for the first time without looking at the comments or answers of others.
S
Sachini Kaushalya·
Thank you for leaving this comment. I learnt from your comment
M
Melwyn·
Hi Sir,
Thank you very much. We really appreciate your efforts in the excellent explanation of each chapter and problem solving and your responses to queries. We are highly obliged to you and Open Tuition for bringing this platform to all aspiring ACCA students.
J
John MoffatTutor·
Thank you very much for your comment :-)
P
Poonam·
Hi John. Ur lectures are really helpful indeed. Just a small query. why do we consider fixed cost in q1 while calculating the total cost? thanks in advance
J
John MoffatTutor·
It is because they are using absorption costing - with absorption costing we always absorb and include the fixed production cost.
W
wolde·
In the determination of selling price(Qn.#1): Margin is related with selling price whereas Mark-up is related with cost.i.e when margin is given, the base for calculation is selling price and for mark-up the base will be cost figure. Am I true?
J
John MoffatTutor·
Yes, that is true (and I do explain this in my lectures :-) )
The free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.
K
Krupali·
hi
in the first question of test , where is 100/80 coming ?
cant we just calculate 26*20% = 31.20
but the answer showing here is 100/80*26 = 32.50
Can you please explain ??
Thanks
Krupali
J
John MoffatTutor·
A gross profit margin of 20% means that the profit is 20% of the selling price.
So for every $100 selling price, the profit is $20 and therefore the cost is $80.
Putting it the other way round, for every $80 cost the selling price will be $100.
Therefore is the cost is $26, the selling price must be 100/80 x $26.
K
Krupali·
Understood .
:)
Thanks
J
John MoffatTutor·
You are welcome :-)
J
joyo·
So although Q5 did not have the option of Price Discrimination, it is in fact the same as Differential Pricing.
J
John MoffatTutor·
Yes (as I state in the free lecture) :-)
S
Sukhdeb·
what does it mean by penetration pricing ? please explain.
J
John MoffatTutor·
It is explained in full in my free lectures on pricing (along with all other other pricing strategies you are expected to be aware of).
There is no point in attempting the tests unless you have already watched the lectures.
(The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.)
Y
Yahya·
Hi Mr John
I know in advance that I will have to watch the video but the only bit I do not understand is where 8 coming from
1- DY/DX = 30/10000=0.003
2- (0.003*100000)+200=500
3-Price demand equation = P-0.003*X =500-0.003X
4- differentiation = 500-0.006x
5- Maximising profit = MR=MC
6- so 500 – 0.006Q = 8 ? Please how?
7- Q Units =82000
8- Price demand of units will be; 500-(82000*0.003)=254
The only thing I am not clear is where 8 comes from, really appreciate
Y
Yahya·
Is this 8 is the VC ? If yes then I got the technique.
J
John MoffatTutor·
Yes, as you will see in the lecture, the optimum price is when marginal revenue = marginal cost.
A
Acca student·
In example about penetration pricing, how to define that it's not volume discounting?
J
John MoffatTutor·
Volume discounting is when a customer buying a large quantity is given a discount.
A
Acca student·
Okay. thanks for reply.
J
John MoffatTutor·
You are welcome :-)
A
ABIGAIL·
hi Mr. Moffat, please how is it that in qtn 2, the b is not arrived at this way?...
P = a - bQ
25 = a - 20,000b ..... (i)
30 = a - 18,000b ......(ii)
or is it just basic arithmetic that when a negative number is cross dividing is doesn't change to a positive number?
T
Tafara Paul·
Thanx very much.
J
John MoffatTutor·
You are welcome :-)
D
denesh·
Hi Sir,
I did that question. Thank you for the explanation.
I was on about the question where it says materials is $10, labour is $8, variable is $3 and fixed costs is $5.
How to work out the seling price?
J
John MoffatTutor·
The total cost is $26 per unit.
The margin is 20%. So the profit is 20% of selling price, and therefore the cost is 80% of selling price.
Since the cost is 26, the selling price must be 26/80% = $32.50.
D
denesh·
Hi Sir,
How do you work out question 1?
J
John MoffatTutor·
I assume that you have watched the free lecture for Chapter 7 before attempting this test?
For the price demand equation, b = 30/10000 = 0.003
a = 200 + (100,000 x 0.003) = 500
So P = 500 - 0.003Q
So the marginal revenue = MR = 500 - 0.006Q
For maximum profit MR = MC
so 500 - 0.006Q = 8
so Q = 492/0.006 = 82,000
Therefore, in the price demand equation, P = 500 - (82,000 x 0.003) = $254 per unit
C
Caroline·
where is the 0.006 coming from, when we got our b as 0.003?
J
John MoffatTutor·
If you look at the formula on the formula sheet for the marginal revenue, you will see that it has 2b in it!
(I do suggest that you watch our free lectures before you try the practice tests - our lectures are a complete course for Paper F5 and I actually work through this example in the lecture on pricing!!!)
Question 5 - presumably price discrimination and differential pricing are the same. I don't recall that being made clear in the lecture? By process of elimination we can arrive at the right answer but why is there two different terms? Do the other pricing strategies have other names that we don't know about?
Cheers
Although penetration pricing is often used when it is a new product, it does not have to be the case. Even with existing products a low price may be used for a period in order to try and gain market share.
In Question No 1
Total 26
Gross profit 20
So cost 100 , Profit 120
Total cost = 26
Profit
26*20/100 = 5.2
Selling price= 31.2 but How it coming 32.5
Kindly explain
If the profit is 20% of the selling price, then the cost is 80% of the selling price.
Therefore the selling price is 26/80% =$32.50.
(and, of course, it checks. The profit is 32.50 - 26.00 = 6.50, and 20% x 32.50 = 6.50 :-) )
Im not sure About Hi John- im not sure if i get this calculation a= 200+(.003*100,000) = 500 . Can you please explain?
I made a mistake in calculation in the equation MR=MC that
a-2bQ=8*Q.
my question is that if the marginal cost is always equal to variable cost?
Have you watched our free lectures on this?
Have you watched my free lectures on this?
And for the absorption costing, fixed overhead costs should be allocated to a product whether or not it was sold in the period, but why the overhead cost $5 is excluded here?
The gross profit margin is the profit as a % of the selling price. So for every $100 selling price, the profit is $20 and therefore the cost is $80. Putting it the other way round, for every $80 cost, the selling price is $100. Therefore for a cost of $26, the selling price must be 100/80 x $26.
(Mark-up is the profit as a % of the cost. You can find more examples of both the gross margin and the mark-up in the Paper FA lectures on "mark-ups and margins")
The formula provided for the marginal revenue contains 2b, and 2 x 0.003 = 0.006
Did you watch the free lectures before attempting the test?
Dear Sir,
I am a bit confused here. Price demand equation is P= a-bQ . Therefore the answer should be P=75-.0025Q and I have got it wrong. Could you please explain.
P = a - bq
So here I have to find first b= change in price/ change in qty
5/2000 = 0.0025
Next step is I have to find a so
P= a-bq
25 = a-(0.0025*20000)
a= 75
So therefore answer is p=75-0.0025q.
I hope u understand
? = ? + ? ?, but your calculation shows a “?” instead of a “+”.
1. 100/80 * 26
2. 120/100 * 26
3. 26*100/20
like on absorption costing question about selling price,i got it wrong coz i am always confused when it comes to the three ways. like the way the questions are asked,how best can l know which one to use.?
(It may help you to watch the Paper FA lectures on mark-ups and margins.)
i hope you are well. One Qs; i do not understand why you did 100/80*26 Can you please explain?
thank you,
Are both the same thing?
Isn't a penetration strategy used for relatively new products in an already established market? Isn't it a long term approach rather than a short term (2 weeks). I read it in another subject of mine that penetration pricing is used when the market is old but the product is new. Please clear my confusion. Because there are 2 major strategies for new products ( price skimming and market penetration), price skimming is a short term strategy to sell products at the higher price initially so as to take advantage of lack of competitors and new technology and recover the cost of production and profit as soon as possible. And market penetration is a long term strategy to sell below the present market price to get accepted by the consumers. Where did I understand wrong?
It totally depends on the company on how long they want to use the strategy according to market response and various factors.
But as in question 4 it is clearly given that it is given a promotional discount in hopes of increasing price in 2 weeks.
Hope i am able to clear your doubt.
Thank you
is product line pricing the same as differential pricing
Thank you very much. We really appreciate your efforts in the excellent explanation of each chapter and problem solving and your responses to queries. We are highly obliged to you and Open Tuition for bringing this platform to all aspiring ACCA students.
The free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.
in the first question of test , where is 100/80 coming ?
cant we just calculate 26*20% = 31.20
but the answer showing here is 100/80*26 = 32.50
Can you please explain ??
Thanks
Krupali
So for every $100 selling price, the profit is $20 and therefore the cost is $80.
Putting it the other way round, for every $80 cost the selling price will be $100.
Therefore is the cost is $26, the selling price must be 100/80 x $26.
:)
Thanks
There is no point in attempting the tests unless you have already watched the lectures.
(The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.)
I know in advance that I will have to watch the video but the only bit I do not understand is where 8 coming from
1- DY/DX = 30/10000=0.003
2- (0.003*100000)+200=500
3-Price demand equation = P-0.003*X =500-0.003X
4- differentiation = 500-0.006x
5- Maximising profit = MR=MC
6- so 500 – 0.006Q = 8 ? Please how?
7- Q Units =82000
8- Price demand of units will be; 500-(82000*0.003)=254
The only thing I am not clear is where 8 comes from, really appreciate
P = a - bQ
25 = a - 20,000b ..... (i)
30 = a - 18,000b ......(ii)
(i) - (ii)
-5 = 0 - (20,000b - (-18,000b)
-5 = -20,000b + 18,000b
-5 = -2,000b
-5/2,000 = b
thus b = -0.0025
I did that question. Thank you for the explanation.
I was on about the question where it says materials is $10, labour is $8, variable is $3 and fixed costs is $5.
How to work out the seling price?
The margin is 20%. So the profit is 20% of selling price, and therefore the cost is 80% of selling price.
Since the cost is 26, the selling price must be 26/80% = $32.50.
How do you work out question 1?
For the price demand equation, b = 30/10000 = 0.003
a = 200 + (100,000 x 0.003) = 500
So P = 500 - 0.003Q
So the marginal revenue = MR = 500 - 0.006Q
For maximum profit MR = MC
so 500 - 0.006Q = 8
so Q = 492/0.006 = 82,000
Therefore, in the price demand equation, P = 500 - (82,000 x 0.003) = $254 per unit
(I do suggest that you watch our free lectures before you try the practice tests - our lectures are a complete course for Paper F5 and I actually work through this example in the lecture on pricing!!!)