(a) A manufacturing company is considering its pricing policy for next year. It has already carried out some market research into the expected levels of demand for one of its products at different selling prices, with the following results:

This product is manufactured in batches of 100 units, and analysis has shown that the total production cost depends on the number of units as well as the number of batches produced each year. This analysis has produced the following formula for total cost:

Where Z represents the total production cost 

x represents the number of units produced; and 

y represents the number of batches of production.

Required:
(i) Prepare calculations to identify which of the above six selling prices per unit will result in the highest annual profit from this product.
(ii) Explain why your chosen selling price might not result in the highest possible annual profit from this product.

(b) The company is also launching a new product to the market next year and is currently considering its pricing strategy for this new product. The product will be unlike any other product that is currently available and will considerably improve the efficiency with which garages can service motor vehicles. This unique position in the market place is expected to remain for only six months before one of the company’s competitors develops a similar product.

The prototype required a substantial amount of time to develop and as a result the company is keen to recover its considerable research and development costs as soon as possible. The company has now developed its manufacturing process for this product and as a result the time taken to produce each unit is much less than was required for the first few units. This time reduction is expected to continue for a short period of time once mass production has started, but from then a constant time requirement per unit is anticipated.

Required:
(i) Explain the alternative pricing strategies that may be adopted when launching a new product.

(ii) Recommend a pricing strategy to the company for its new product and explain how the adoption of your chosen strategy would affect the sales revenue, costs and profits of this product over its life cycle.

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Selling price per unit $100 $120 $130 $150 $160 $170 Annual demand (units) 50,000 45,000 40,000 25,000 10,000 5,000