Advanced: Selection of optimal selling price based on demand and cost schedules Sniwe pic intend to launch a commemorative product for the 2004 Olympic games onto the UK market commencing 1 August 2002. The product will have variable costs of £16 per unit.

Production capacity available for the product is sufficient for 2000 units per annum. Sniwe pic has made a policy decision to produce to the maximum available capacity during the year to 31 July 2003.

Demand for the product during the year to 31 July 2003 is expected to be price dependent, as follows:

It is anticipated that in the year to 31 July 2004 the availability of similar competitor products will lead to a market price of £40 per unit for the product during that year.
During the year to 31 July 2004, Sniwe pic intend to produce only at the activity level required to enable them to satisfy demand, with stocks being run down to zero if possible. This policy is intended as a precaution against a sudden collapse of the market for the product by 31 July 2004.
Required:
(Ignoring tax and the time value of money.)

(a) Determine the launch price at 1 August 2002 which will maximize the net benefit to Sniwe pic during the two year period to 31 July 2004 where the demand potential for the year to 31 July 2004 is estimated as (i) 3600 units and (ii) 1000 units. (12 marks)

(b) Identify which of the launch strategies detailed in (a)(i) and (a)(ii) above will result in unsold stock remaining at 31 July 2004.
Advise management of the minimum price at which such unsold stock should be able to be sold in order to alter the initial launch price strategy which will maximize the net benefit to Sniwe pic over the life of the product.
(6 marks)

(c) Comment on any other factors which might influence the initial launch price strategy where the demand in the year to 31 July 2004 is estimated at 1000 units. (4 marks)
(Total 22 marks) ACCA Level 2 Management AccountingLO1

Transcribed Image Text:

Selling price per unit Annual sales () (units) 20 2000 30 1600 40 1200 50 1100 60 1000 70 700 80 400