Massimo Ltd has successfully developed a new battery for electric vehicles that provides a much longer driving range and has a quicker recharge time that any other battery currently available in the market.

Given the push by governments and corporates alike to play their part in combatting climate change and reduce harmful gases emitted in the atmosphere, the new battery is expected to be extremely well received in the market and could potentially see a significant shift by consumers for a bigger adoption of electric vehicles.

As Massimo Ltd has incurred high research and development costs and the fact that production will be limited in the early stages of the product lifecycle, the company wants to ensure that the price it will charge is set at the right level.

The marketing department has conducted some initial market research and their findings show that if price will be set at 1,200 per unit, demand will be 7,000 units per month. However, if price were to be reduced by 200, demand would increase by 500 units and if price were to be increased by 200, then demand would fall by 500 units.

To support with decision-making, the management accountant has produced the following production costs forecast at various level of production in relation to the new battery. This is provided in the table below:

Production & Sales (units)	1,500	3,000	6,800	12,000
Direct Material	225,000	450,000	1,020,000	1,800,000
Direct Labour	270,000	540,000	1,224,000	2,160,000
Overheads	4,905,000	5,010,000	5,276,000	5,640,000

In addition to the above, fixed non-production costs are expected to be 2,000,000 monthly.

Massimo Ltd currently does not produce or sell any other products and it plans to produce 6,000 units monthly. However, the company does have the capacity to produce up to 12,000 units per month currently without any increase in fixed costs.

REQUIRED

(a) Calculate the selling price that Massimo Ltd will set for the new battery if it:

1. uses a marginal cost-plus policy and applies an 300% mark-up to the marginal cost (variable cost) of the product.

[4 marks]

[Question 3 continues on next page]

1. uses a full cost-plus policy and applies a 75% mark-up to the full cost of the product.

[4 marks]

(b) Calculate the profit maximising selling price and the resulting profit per month for Massimo Ltd.

[7 marks]

(c) During the recent board meeting prior to launch of the product, the finance director has advocated for charging a high price for the product while the sales director is in favour of charging a low price.

Critically discuss the key factors that Massimo Ltd should consider prior to deciding on a suitable pricing policy for the product.

[10 marks]

[Total: 25 marks]