AceCakes is a cake producer and retailer with stores throughout the UK. AceCakes is launching a new product, the MiniCake, which it believes will become a best seller. The company is currently trying to decide what price to charge for the MiniCake and the following cost information has been provided for a batch of MiniCakes (a batch consists of 20 MiniCakes):

Ingredient A: Each batch of MiniCakes produced requires 1kg of ingredient A at a cost of 2 per kg. The production process loses 10% of all ingredient A used in the production process.

Ingredient B: Each batch of MiniCakes produced requires 2.2kg of ingredient B at a cost of 5 per kg. AceCakes is able to obtain a 20% discount on all purchases of ingredient B.

Labour: Each batch of MiniCakes produced requires 1.5 hours of labour at a rate of 12 per hour.

AceCakes absorbs variable overheads at the rate of 150% of labour rates and facility-sustaining overheads are 20% of the variable overheads.

AceCakes outsources delivery of the MiniCakes from its factories to its retail stores, paying a third-party distributor 2.50 per batch of MiniCakes delivered.

The Finance Director has suggested that a cost-plus approach to pricing would be suitable for the MiniCake, and that a margin of 25% would be in line with the industry average.

Requirements:

1. Following the Finance Directors suggestion, calculate the price that AceCakes would charge for one MiniCake.

(1 marks)

2. Explain your treatment of the facility-sustaining overheads in your calculation for (a).

(1 marks)

3. Identify and explain four additional considerations, other than cost, which should be taken into account before deciding upon a price for the MiniCake.

(1 marks)

4. AceCakes incurred significant expenditure on research and development (R&D) prior to producing the MiniCake. The Sales Director has argued that this is a past cost and should therefore have no bearing on the price charged for the MiniCake. Explain whether or not acknowledging R&D costs in the price of the MiniCake would be a sensible approach.