- 10 Marks
MA – L2 – Q49 – Pricing Strategies
Question
Nexco Limited has developed a new product, Product X, that it wishes to introduce to the market. The cost per unit is expected to be as follows, assuming annual sales of 40,000 units.
Cost per unit
| Cost Item | GH¢ |
|---|---|
| Direct materials: | |
| Material M1 (2 litres at GH¢15) | 30 |
| Material M2 (0.5 litres at GH¢8) | 4 |
| Direct labour (3 hours at GH¢10) | 30 |
| Fixed overheads (3 hours at GH¢12) | 36 |
| Full cost | 100 |
It has been company policy to price products to achieve a profit of 16.67% (one-sixth) on the sales price.
Required:
(a) Calculate the selling price that would be charged if Nexco Limited applies its normal pricing policy.
(b) If Nexco Limited decided to price products at marginal cost plus, what mark-up on the marginal cost would be required to obtain the same selling price as in (a)?
(c) Suggest two other pricing strategies that might be applied to decide a selling price for Product
Answer
(A)
If the profit margin is one-sixth of the selling price:
| GH¢ | |
|---|---|
| Selling price | 100.00 |
| Profit as a % of sales price | 16.67 |
| Full cost as % of sales price | 83.33 |
| Profit as % of full cost = (16.67 / 83.33) × 100% = 20% |
| GH¢ | |
|---|---|
| Full cost | 100 |
| Profit margin (20%) | 20 |
| Selling price | 120 |
(B)
| GH¢ | |
|---|---|
| Direct materials: | |
| Material M1 | 30 |
| Material M2 | 4 |
| Direct labour | 30 |
| Variable cost | 64 |
| Selling price | 120 |
| Mark-up | 56 |
The required mark-up on variable cost would be 56 / 64 = 0.875 or 87.5%.
(C) Alternative pricing strategies are price skimming and penetration pricing. Premium pricing would also be an acceptable solution.
Price discrimination, with different prices charged for the same product in different geographical markets, would also be acceptable.
- Tags: Cost-plus pricing, decision making, Pricing, Profit Margin, Selling price
- Level: Level 2
- Topic: Decision making techniques
- Uploader: Salamat Hamid