You have been asked to provide budgetary information to the board of Directors for a meeting where they will decide the pricing of an important product for the next period.

The following information is available from the records:

You find that between the previous and current periods there was a4% general inflation rate and it is forecast that costs will further increase by 6% in the next period.

The firm did not increase the selling price in the current periodalthough competitors raised their prices by 4% to allow for theincreased costs.

A survey by economic consultants was commissioned and has foundthat the demand for the product is elastic with an estimated priceelasticity of demand of 1.5. This means that volume will fall by one anda half times the rate of real price increase.

Required:

(a) Show the budgeted position if the firm maintains a $13 selling price for the next period (when it is expected that competitors will increase their prices by 6%)

(b)Show the budgeted position if the firm increases its prices by 6%

(c)Write a short report to the Board, withappropriate figures, recommending whether the firm should maintain the$13 selling price or raise it by 6%

 

Sales (100,000 @ $13) Costs Profit Last year $000 1,300 1,000 300 Profit Sales (106,000 @ $13) Costs This year $000 1,378 1,077.4 300.6