Advanced: Impact of a change in selling price on profits based on a given elasticity of demand You are the management accountant of a medium¬ sized company. You have been asked to provide budgetary information and advice to the board of directors for a meeting where they will decide the pricing of an important product for the next period.

The following information is available from the records:

You find that between the previous and current periods there was 4% general cost inflation and it is forecast that costs will rise a further 6% in the next period. As a matter of policy, the firm did not increase the selling price in the current period although competitors raised their prices by 4% to allow for the increased costs. A survey by economic consultants was commissioned and has found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume would fall by l) times the rate of real price increase.
Various options are to be considered by the board and you are required

(a) to show the budgeted position if the firm maintains the £13 selling price for the next period (when it is expected that competitors will increase their prices by 6%); (10 marks)

(b) to show the budgeted position if the firm also raises its price by 6%; (6 marks)

(c) to write a short report to the board, with appropriate figures, recommending whether the firm should maintain the £13 selling price or raise it by 6%;

(d) to state what assumptions you have used in your answers.LO1

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Previous Current period period Sales (000) (000) (100 000 units (106000 units at 13 each) 1300 at 13 each) 1378.0 Costs 1000 1077.4 Profit 300 300.6