A manufacturer of electrical appliances is continually reviewing its product range and enhancing its existing products by
Question:
A manufacturer of electrical appliances is continually reviewing its product range and enhancing its existing products by developing new models to satisfy the demands of its customers. The company intends to always have products at each stage of the product life cycle to ensure the company’s continued presence in the market.
Currently the company is reviewing three products:
Product K was introduced to the market some time ago and is now about to enter the maturity stage of its life cycle. The maturity stage is expected to last for ten weeks. Each unit has a variable cost of \($38\) and takes 1 standard hour to produce. The Managing Director is unsure which of four possible prices the company should charge during the next ten weeks. The following table shows the results of some market research into the level of weekly demand at alternative prices:
Product L was introduced to the market two months ago using a penetration pricing policy and is now about to enter its growth stage.
This stage is expected to last for 20 weeks. Each unit has a variable cost of \($45\) and takes 1.25 standard hours to produce.
Market research has indicated that there is a linear relationship between its selling price and the number of units demanded, of the form P = a − bx. At a selling price of \($100\) per unit demand is expected to be 1000 units per week. For every \($10\) increase in selling price the weekly demand will reduce by 200 units and for every \($10\) decrease in selling price the weekly demand will increase by 200 units.
Product M is currently being tested and is to be launched in ten weeks’ time. This is an innovative product which the company believes will change the entire market. The company has decided to use a market skimming approach to pricing this product during its introduction stage.
The company currently has a production facility which has a capacity of 2 000 standard hours per week. This facility is being expanded but the extra capacity will not be available for ten weeks.
Required:
(a) (i) Calculate which of the four selling prices should be charged for product K, in order to maximise its contribution during its maturity stage;
and as a result, in order to utilise all of the spare capacity from your answer to (i) above, (ii) Calculate the selling price of product L during its growth stage.
(b) Compare and contrast penetration and skimming pricing strategies during the introduction stage, using product M to illustrate your answer
(c) Explain with reasons, for each of the remaining stages of M’s product life cycle, the changes that would be expected in the (i) average unit production cost (ii) unit selling price
Step by Step Answer:
