Question

Albany has recently spent some time on researching and developing a new product for which they are trying to establish a suitable price. Previously they have used cost-plus 20 per cent to set the selling price.

The standard cost per unit has been estimated as follows:

	£
Direct materials:
Material 1	10		(4kg at £2.50/kg)
Material 2	7		(1kg at £7.00/kg
Direct labour	13		(two hours at £6.50/hour)
Fixed overheads	7		(two hours at £3.50/hour)
	37

Required:

1. Using the standard costs calculate two different cost-plus prices using two different bases and explain an advantage and disadvantage of each method.

2. Give two other possible pricing strategies that could be adopted and describe the impact of each one on the price of the product.

Answer 1

a)
Cost plus Prices
Marginal cost Plus = DM + DL x (1+ markup%)
Marginal cost Plus = $30 x (1+ 20%)	$                    36.00
Advantage	Disadvantage
a) Simple and Easy to Calculate	a)Ignores Fixed Expenses
b) Its easy to adjust the markup%.	b)Ignores price/demand relationship
c) Focus on Contribution
Total cost Plus
Total cost Plus = Total cost +(1+ markup%)
Total cost Plus = $37 x (1 +20%)	$                    44.40
Advantage	Disadvantage
a) Simple and Easy to Calculate	a)Ignores price/demand relationship
b) Its easy to adjust the markup%.	b) ignores Fixed cost per unit
c) Product is not sold below full cost
d) Ensures Profit be made
b)
a) Penetration Pricing - Initially Enter the market with low price in order to achieve market gain.
b) Premium Price- Charging a higher price than the competitors as introducing with upgraded or new features.