Management Accounting

Question 1 [39 marks) Most businesses have been impacted negatively in 2020 by the outbreak of Corona virus leading to the disease Covid 19. Many countries went in lock down where by economic activities nearly came to a halt. Given that there is no known vaccine for this disease, Namibia Pharmaceuticals Ltd (\"NP") has currently ventured into developing a painkiller called CovRelief ("CoR\") which has been clinically tested by the World Health Organisation (WHO) and has been found to reduce the symptoms of Covid 19 on patients. This painkiller has never been sold in the market before and it is foreseen that it will be ready for the market at the beginning 2021. The company has already spent high costs in research and development of the painkiller. Since this is the rst time the CoR is being marketed, NP is not sure of which price to charge. The market research conducted has shown that for every decline in price of N53 the demand is expected to increase by 5 000 batches. The maximum demand for CoR is expected to be one million batches. The production of CoR is expected to require the following resources: 1. Direct materials One batch of CoR requiresthe following materials: IE_ NSIOO per Ks NSsoo per Kg 2. Direct labour The production of the CoR will require a new skill that has never been employed at NP. The skill will cost NP N5180 per hour. Since it is the rst time to produce such painkiller at NP and the staff are completely new, NP anticipates that it will take the employees 5 hours to produce the first batch and a learning curve rate of 85% is expected to last until the 1 000th batch has been produced. 3. Fixed manufacturing overheads For the year 2021, 250 000 batches are budgeted. The total fixed manufacturing overheads will be absorbed at a rate of N52 per batch. 4. Variable manufacturing overheads The variable manufacturing overheads constitute the machine running time needed to produce one batch of the CoR. One batch will require 30 minutes of machine time and each machine hour costs NP N590. The management of NP have agreed that determination of the price for CoR should be centered on the time it takes to manufacture the 1 000th batch. The learning rate of 85% is associated with a co-efcient, b = 0234465 The demand function is represented by: P = a - bX The profit maximisation formula is represented by: MR = a ZbX Page 10 of 16 Imll 1. 1 Applying the demand curve equation, determine the prot- maximising selling price that should be charged for the CoR. 1 2 Calculate the total profit that NP will make from CoR Disregarding your answer to (1.1) above, discuss the pricing strategyes) you would recommend NP to follow in pricing the CoR and why? N. B. Where relevant, show all the necessary workings - Total 39