Advanced : Pricing dec ision based on competitor 's response In the market for one of its products, MD and its two major competitors (CN and KL) together account for 95% of total sales.

The quality of MD's products is viewed by customers as being somewhat better than that of its competitors and therefore at similar prices it has an advantage During the past year, however, when MD raised its price to £1.2 per litre, competitors kept their prices at £1.0 per litre and MD's sales declined even though the total market grew in volume.

MD is now considering whether to retain or reduce its price for the coming year. Its expectations about its likely volume at various prices charged by itself and its competitors are as follows.

Experience has shown that CN tends to react to MD's price level and KL tends to react to CN's pnce level. MD therefore assesses the following probabilities

Costs per litre of the product are as follows:
D1rect wages £0.24 Direct materials £0.12 Departmental expenses:
Indirect wages.
mamtenance and supplies 162.'.!% of direct wages Supervtsion and depreciation £540 000 per annum General works expenses (allocated) 16%% of prime cost Selling and administration expenses (allocated) 50% of manufacturing cost You are required to state whe ther, on the basis of the data given above, it would be most advantageous for MD to fix its price per litre for the coming year at £1.2, £1.1 or £1.0 Support your answer with relevant calculations

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222222222 MD Prices per litre CN KL (F) () () 1.2 1.2 1.2 MD's expected sales million litres 2.7 1.2 1.2 1.1 2.3 1.2 1.2 1.0 2.2 1.2 1.1 1.1 2.4 1.2 1.1 1.0 2.2 1.2 1.1 1.0 2.1 1.1 1.1 1.1 2.8 1.1 1.0 1.0 2.4 1.1 1.0 1.0 2.3 1.0 1.0 1.0 2.9