ACCA PM · Guided practice (Show me how)
Chapter 7: Pricing
Pricing: cost-plus, the tabular optimum and price elasticity
Part (a). A new product is being launched, and the following costs have been estimated: materials $10 per unit; labour $8 per unit; variable overheads $5 per unit. Fixed overheads have been estimated to be $50,000 per year, and the budgeted production is 10,000 units per year. Calculate the selling price based on full cost plus 20%, and on marginal cost plus 40%.
Part (b). Kennedy plc has established that the price demand relationship for its jars of coffee, and the cost per unit of producing them, are as follows:
| S.P. p.u. ($) | Demand (units) | Cost p.u. at that quantity ($) |
|---|---|---|
| 16 | 100 | 14.0 |
| 15.5 | 200 | 13.9 |
| 15 | 300 | 13.8 |
| 14.5 | 400 | 13.7 |
| 14 | 500 | 13.6 |
| 13.5 | 600 | 13.5 |
| 13 | 700 | 13.4 |
Determine the optimal selling price in order to maximise profit.
Part (c). Using the figures from part (b), calculate the price elasticity of demand if the current selling price is $16 per unit, and if the current selling price is $15 per unit.
(a) Full cost-plus and marginal cost-plus
Calculate the company's full cost per unit and its full cost-plus and marginal cost-plus selling prices.
(b) The tabular approach: where MR stops exceeding MC
Calculate Kennedy's marginal revenue and marginal cost at the relevant output changes, profit-maximising price and maximum profit.
(c) Price elasticity of demand
Calculate the price elasticity of demand for the specified price changes.
Opening this exercise…