Case study 1

LMVH Corp is in the process of establishing selling prices for two of its products: A bag and B

bag, which the company is newly introducing in the market. Both bags will be manufactured

at their new factory in Bangladesh which aims to earn a profit of 20% on its capital employed.

The estimated data for the two bags are as follows:

Particulars

A bag

B bag

Estimated annual demand (units)

100,000

200,000

Direct materials cost per unit

$15.00

$14.00

Direct labour cost per unit

(Direct labour rate per hour: $3.00)

$9.00

$6.00

The amount of manufacturing overheads for each bag equal to the total amount of direct labour

cost for the respective bag. It is also noted that 50% of manufacturing overheads are fixed in

nature. Administration overheads amount to $330,000 per annum for A bag and $520,000 per

annum for B bag. Variable selling expenses amount to $1.50 per unit of A bag and $2.00 per

unit of B bag. Fixed selling expenses amount to $150,000 per annum for A bag and $400,000

per annum for B bag. The total capital employed by the factory in Bangladesh amounts to

$10,225,000.

Required:

(a) As an expert on cost analysis help LMVH Corp to determine a minimum selling price

for the introduction phase of the two products so that the company can quickly gain

market share. Briefly explain this pricing strategy.

(b) Help LMVH Corp to determine the long-term selling prices for A bag and B bag such

that the contribution per direct labour hour is the same for both the products.

(c) Determine break-even points in units and sales value for A bag and B bag based on

the selling prices you arrived at in requirement (b) above. Also, determine the margin

of safety in units and sales value for A bag and B bag based on the estimated demand

and the selling prices you arrived at in requirement (b) above.