VI pic produces a number of mobile telephone products. It is an established company with a good reputation that has been built on well-engineered, reliable and good-quality products. It is currently developing a product called Compute and has spent £1.5 million on development so far. It now has to decide whether it should proceed further and launch the product in one year's time.

If VI pic decides to continue with the project, it will incur further development costs of £0.75 million straight away. Assets worth £3.5 million will be required immediately prior to the product launch, and working capital of £1.5 million would be required. VI pic expects that it could sell Compute for three years before the product becomes out of date.

It is estimated that the first 500 Computes produced and sold would cost an average of £675 each unit, for production, marketing and distribution costs. The fixed costs associated with the project are expected to amount to £2.4 million (cash out flow) for each year the product is in production.

Because of the cost estimates, the Chief Executive expected the selling price to be in the region of

£950. However, the Marketing Director is against this pricing strategy; he says that this price is far too high for this type of product and that he could sell only 6,000 units in each year at this price. He suggests a different strategy: setting a price of £425, at which price he expects sales to be 15,000 units each year.

VI pic has found from past experience that a 70% experience curve applies to production, marketing and distribution costs. The company's cost of capital is 7% a year.

Required:

(a) The Chief Executive has asked you to help sort out the pricing dilemma. Prepare calculations that demonstrate:
- which ofthe two suggestions is the better pricing strategy;
- the financial viability ofthe better strategy. (15 marks)

(b) Discuss other issues that VI pic should consider in relation to the two pricing strategies.
(5 marks)

(c) Calculate and comment on the sensitivity of the financially better pricing strategy to changes in the selling price. (4 marks)

(d) Discuss the usefulness of the experience curve in gaining market share. Illustrate your answer with specific instances/examples.