PRICING DECISIONS AND PROFITABILITY

Sniwe Ltd intend to launch a commemorative product on 1 August 2017 for a sports event commencing in 2019. The product will have variable costs of R160 per unit. production capacity available for the product is sufficient for 2,000 units per annum. Sniwe Ltd has made a policy decision to produce to the maximum available capacity during the year to 31 July 2018. Demand for the product during the year to 31 July 2018 is expected to be price dependent, as follows: Selling price per unit annual sales 200. 2000 300. 1600 400. 1200 500. 1100 600. 1000 700. 700 800. 400

It is anticipated that in the year to 31 July 2019 the availability of similar competitor products will lead to a market price of R400 per unit for the product during that year.

During the year to 31 July 2019, Sniwe Ltd intend to produce only at the activity level required to enable them to satisfy demand, with stocks being run down to zero if possible. This policy is intended as a precaution against a sudden collapse of the market for the product by 31 July 2019.

Required: (Ignore tax and the time value of money.)

(a) Determine the launch price at 1 August 2017 which will maximise the net benefit to Sniwe Ltd during the two-year period to 31 July 2019 where the demand potential for the year to 31 July 2019 is estimated as (i) 3600 units and (ii) 1000 units. (b) Identify which of the launch strategies detailed in (a) (i) and (a) (ii) above will result in unsold stock remaining at 31 July 2019. Advise management of the minimum price at which such unsold stock should be able to be sold in order to alter the initial launch price strategy which will maximise the net benefits to sniwe Ltd over the life of the product. (c) Comment on any other factors that might influence the initial launch price strategy where the demand in the year to 31 July 2019 is estimated at 1000 units.

the year to 31 July 2019 is estimated as (i) 3,600 units and (ii) 1,000 units. (12 marks) (b) Identify which of the launch strategies detailed in (a)(i) and (a)(ii) above will result in unsold stock remaining at 31 lulv 2019. Advise management