Advanced: Discussion of pricing strategies A producer of high quality executive motor cars has developed a new model which it knows to be very advanced both technically and in style by comparison with the competition in its market segment.

The company’s reputation for high quality is well-established and its servicing network in its major markets is excellent. However, its record in timely delivery has not been so good in previous years, though this has been improving consider¬ ably.

In the past few years it has introduced annual variations/improvements in its major models. When it launched a major new vehicle some six years ago the recommended retail price was so low in relation to the excellent specification of the car that a tremendous demand built up quickly and a two-year queue for the car developed within six months. Within three months a second-hand model had been sold at an auction for nearly 50% more than the list price and even after a year of produc¬ tion a sizeable premium above list price was being obtained.

The company considers that, in relation to the competition, the proposed new model will be as attractive as was its predecessor six years ago. Control of costs is very good so that accurate cost data for the new model are to hand. For the previous model, the company assessed the long¬ term targeted annual production level and calcu¬ lated its prices on that basis. In the first year, production was 30% of that total.

For the present model the company expects that the relationship between first-year production and longer-term annual production will also be about 30%, though the absolute levels in both cases are expected to be higher than previously.

The senior management committee, of which you are a member, has been asked to recommend the pricing approach that the company should adopt for the new model.

You are required

(a) to list the major pricing approaches available in this situation and discuss in some detail the relative merits and disadvantages to the com¬ pany of each approach in the context of the new model; (15 marks)

(b) to recommend which approach you would propose, giving your reasons; (5 marks)

(c) to outline briefly in which ways, if any, your answers to

(a) and

(b) above would differ if, instead of a high quality executive car, you were pricing a new family model of car with some unusual features that the company might introduce. (5 marks)

(Total 25 marks) CIMA Stage 4 Management Accounting Decision Making LO1