9.3 Sharma pic makes one standard product for which it charges the same basic price of £20 a unit, though discounts are allowed to certain customers. The business is in the process of carrying out a profitability analysis of all of its customers during the financial year just ended.

Information about Lopez Ltd, one of Sharma’s customers, is as follows:

Discount on sales price 5%

Number of units sold 40,000 Manufacturing cost £12 a unit Number of sales orders 22 Number of deliveries 22 Distance travelled to deliver 120 miles Number of sales visits from Sharma’s staff 30 Sharma uses an activity-based approach to ascribing costs to customers, as follows:

Cost pool Cost driver Rate Order handling Number of orders £75 an order Delivery costs Miles travelled £1.50 a mile Customer sales visits Number of visits £230 a visit It is hoped that one new product, which is in a final development stage, will offer some improvement over competitors’ products, which are currently marketed at between £90 and £110 each. Product development engineers have determined that the direct material content is £7 a unit. The product will take 2 labour hours in the electronics department and 1 1 / 2 hours in testing. Hourly labour rates are £20 and £12, respectively.
Management estimates that the fixed costs that would be specifically incurred in relation to the product are: supervision £13,000, depreciation of a recently acquired machine £100,000 and advertising £37,000 a year. These fixed costs are included in the table above.
Market research indicates that the business could expect to obtain and hold about 25 per cent of the market or, optimistically, 30 per cent. The total market is estimated at 20,000 units.
Note : It may be assumed that the existing plan has been prepared to cater for a range of products and no single product decision will cause the business to amend it.
Required:

(a) Prepare a summary of information that would help with the pricing decision for the new product. Such information should include marginal cost and full cost implications after allocation of service department overheads.

(b) Explain and elaborate on the information prepared.