Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the ?Basic?, the ?Standard? and the ?Comprehensive?. The business plans next year to work at absolute full production capacity. Managers believe that the market will not accept any more of any of the three services at the planned prices. The plans are:

The business?s fixed cost totals ?660,000 a year. Each service takes about the same length of time, irrespective of the level.One of the accounts staff has just produced a report that seems to show that the Standard service is unprofitable. The relevant extract from the report is as follows:

The writer of the report suggests that the business should not offer the Standard service next year. The report goes on to suggest that, were the price of the Basic service to be lowered, the market could be expanded.

Required:(a) S hould the Standard service be offered next year, assuming that the quantity of the other services could not be expanded to use the spare capacity?

(b) S hould the Standard service be offered next year, assuming that the released capacity could be used to render a new service, the ?Nova?, for which customers would be charged ?75 per unit, and which would have variable cost of ?50 per unit and take twice as long per unit as each the other three services?(c) What is the minimum price that could be accepted for the Basic service, assuming that the necessary capacity to expand it will come only from not offering the Standard service?

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Number of units of the service Variable cost Selling price Service per unit Basic 50 11,000 6,000 25 Standard 65 Comprehensive 120 90 16,000 Standard service cost analysis Selling price per unit Variable cost per unit Fixed cost per unit 80 (65) (£660,000/(11,000 + 6,000 + 16,000)) (20) (5) Loss