Pricing strategy

Product ‘M’ is currently being tested by MKL and is to be launched in ten weeks’ time. The ‘M’ is an innovative product which the company believes will change the entire market. The company has decided to use a market skimming approach to pricing this product during its introduction stage. MKL continually reviews its product range and enhances its existing products by developing new models to satisfy the demands of its customers. The company intends to always have products at each stage of the product life cycle to ensure the company’s continued presence in the market. MKL is currently reviewing its two existing flagship products, Product K and Product L. You have been given the following information: Product K was introduced to the market some time ago and is now about to enter the maturity stage of its life cycle. The maturity stage is expected to last for ten weeks. Each unit has a variable cost of $38 and takes 1 standard hour to produce. The Managing Director is unsure which of four possible prices the company should charge during the next ten weeks. The following table shows the results of some market research into the level of weekly demand at alternative prices Selling price per unit $100 $85 $80 $75 Weekly demand (units) 600 800 1,200 1,400 Product L was introduced to the market two months ago using a penetration pricing policy and is now about to enter its growth stage. This stage is expected to last for 20 weeks. Each unit has a variable cost of $45 and takes 1.25 standard hours to produce. Market research has indicated that there is a linear relationship between its selling price and the number of units demanded, of the form P = a – bx. At a selling price of $100 per unit demand is expected to be 1,000 units per week. For every $10 increase in selling price the weekly demand will reduce by 200 units and for every $10 decrease in selling price the weekly demand will increase by 200 units. The company currently has a production facility which has a capacity of 2,000 standard hours per week. This facility is being expanded but the extra capacity will not be available for ten weeks. Required: (a) Calculate which of the four selling prices should be charged for product K, in order to maximise its contribution during its maturity stage; (b) Following on from your answer above in (a), calculate the selling price of product L during its growth stage (c) Compare and contrast penetration and skimming pricing strategies during the introduction stage, using product M to illustrate your answer. (7 marks)

here is the question

But parts (a) and (b) are asking about the selling price for two different products.

I am not talking about part a. I am talking about part b. About product L. I calculate the equation that is p=a-bQ. P=126 but the correct ans is P=97.50

I have no idea how you arrived at a figure of 126! The price demand equation is P = 150 - 0.05Q Therefore the marginal revenue is 150 - 0.10Q For maximum profit, 150 - 0.10Q = 45 Therefore Q = 1,050 Therefore P = 150 - (0.05 x 1,050) = 97.50

According to kaplan kit this is the answer of part b. I am clear till the point when P=126. why are we further calculating? in the question they asked for selling price that P=126 so why are we maximizing profit? i didn't get this (b) 1,400 units of Product K will use up 1,400 standard hours; in order to utilise all of the spare capacity, we now need to use 600 hours for Product L, for the first 10 weeks. 1.25hours/600hours= 480 units will use all the spare capacity. To maximise profits, the optimum price P will be expressed as P = a – bQ. Here, a = $100 +( (200/1,000)x $10) So a = $150 and b =200/$10= 0.05 P = $150- 0.05 P = $150 – 0.05 x 480 units P = $126 for the first 10 weeks For the following 10 weeks when the extra capacity becomes available, the optimum price P will be expressed as P = a – bQ and we need to equate MC = MR to maximise profits, with MR = a – 2bQ. Profit maximised when MC = MR When $45 = a – 2bQ When $45 = $150 – 0.10Q When Q =1,050 units And P = $150 – 0.05x 1,050 P = $97.50

If there was no limit on the capacity at all, then the profit maximising price would be $97.50 throughout, calculated in the normal way as I wrote in my previous reply. However, for the first 10 weeks they only have 600 hours available, and so the maximum number of units they can produce during those weeks is 480 units. So to make maximum profit during those 10 weeks they might as well charge the highest price they can that will make sure they sell 480 units. (There is no point in charging a lower price because although the demand will be higher, they will not be able to sell more than they can produce). So they will charge $126 during the first 10 weeks (and be able to sell all the production). After the 10 weeks, they don't have the limit and can produce more, so then they will drop the price to $97.50.

Okay thank you sir.

I don't have the Kaplan kit but is the answer to question (a) $75? Since it yields the highest contribution of $51,800?

aiza: you are very welcome. mjibola: I do not have the Kaplan Kit either. Do not worry about it - stick to the Revision Kit that you have. (I assume that you do have a Revision Kit from one of the ACCA approved publishers? If not then you should buy one immediately if you want to be sure of passing the exam.)

Absolutely! I use BPP.

Great :-)

Sir can you tell me that where in the question does tell that, there is only 600 hours left for the first 10 weeks

It doesn't - you need to calculate it. The question says that there are 2,000 hours available in total. Making 1,400 units of K uses up 1,400 hours. That leaves 600 hours left.

Dear sir Number of hours left for k is 1400. Each unit of k takes 1.2 hrs to be prepared so units of k that can be produced should be 1400/1.25=1120 why is it 1400 everywhere?

The question asks about K You calculate 1,400 units of Product K will use up 1,400 standard hours; in order to utilise all of the spare capacity

sorry but where on earth are you getting: " When Q =1,050 units"?

The price demand equation is P = 150 – 0.05Q Therefore the marginal revenue is 150 – 0.10Q For maximum profit, 150 – 0.10Q = 45 0.10Q = 105 Therefore Q = 1,050