Advanced: Estimates of sales volume and revenues using regress ion analys is and calculation of opt imum
Question:
Advanced: Estimates of sales volume and revenues using regress ion analys is and calculation of opt imum price using differential calculus (See note on page 663)
The Crispy Biscuij Company (CBC) has developed a new variety of biscuit which ij has successfully test marketed in different parts of the country . It has, therefore, decided to go ahead with full-scale production and is in the process of commissioning a production line located in a hijherto unutilized part of the mam factory building The new line will be capable of producmg up to 50 000 packets of new biscuit each week.
The factory accountant has produced the following schedule of the expected unit costs of production at various levels of output
( 1) The labour costs represent the cost of the additional labour that would require to be taken on to operate the new line .
(2) Mach1ne costs include running costs, maintenance costs and depreciation.
(3) Factory overhead costs are fixed for the factory overall but are allocated to cost centres at 25% of total direct costs.
In addition to establishing product acceptability, the test marketing programme also examined the likely consumer response to various selling prices. It concluded that the weekly revenue likely to be generated at various prices was as follows:
The above prices represent the prices at which the product was test marketed, but any price between 60p and 99p is a possibility. The manufacturer receives 50% of the retail revenue.
Requirements
(a) Estimate the variable costs of producing the new biscuit.
using any simple method (such as the high-low method) .
(3 marks)
(b) Using linear regression, estimate the relationship between the price charged by CBC and the expected demand.
(6 marks)
(c) Using the above estimates, calctJiate the optimum price and evaluate how sensnive your solution is to changes in this price.
(8 marks)
(d) Outline the practical problems faced in attempting to derive a unit cost for a new product.
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