Sniwe plc intend to launch a commemorative product for the 2016 Olympic games onto the UK
market commencing 1 August 2014. The product will have variable costs of £16 per unit.
Production capacity available for the product is sufficient for 2000 units per annum. Sniwe plc has made a policy decision to produce to the maximum available capacity during the year to
31 July 2015.
Demand for the product during the year to 31 July 2015 is expected to be price dependent, as follows:
Selling price per unit Annual sales
(£) (units)
20................................... 2000
30................................... 1600
40.................................. 1200
50................................... 1100
60................................... 1000
70................................... 700
80................................... 400
It is anticipated that in the year to 31 July 2016 the availability of similar competitor products will lead to a market price of £40 per unit for the product during that year.
During the year to 31 July 2016, Sniwe plc intend to produce only at the activity level required to enable them to satisfy demand, with stocks being run down to zero if possible. This policy is intended as a precaution against a sudden collapse of the market for the product by 31 July 2016.
Required:
(Ignoring tax and the time value of money.)
(a) Determine the launch price at 1 August 2014 which will maximize the net benefit to Sniwe plc during the two-year period to 31 July 2016 where the demand potential for the year to 31 July 2016 is estimated as (i) 3600 units and (ii) 1000 units.
(b) Identify which of the launch strategies detailed in (a)(i) and (a)(ii) above will result in unsold stock remaining at 31 July 2016. Advise management of the minimum price at which such unsold stock should be able to be sold in order to alter the initial launch price strategy which will maximize the net benefit to Sniwe plc over the life of the product.
(c) Comment on any other factors which might influence the initial launch price strategy where the demand in the year to 31 July 2016 is estimated at 1000 units.