QUESTION 1 - PRICING 25 MARKS Tahiti ple is a well-established manufacturer of high-quality consumer durables. The company has recently developed a state of the art 'travel system' i.e., baby carriage for infant children. The travel system, named the 'Rocket' is manufactured from a rare substance, XEG, which gives superior strength to any travel system that is currently on the market. The marketing director believes that the fact that the 'Rocket' weighs less than half of the weight of all currently available travel systems will give the company a considerable competitive advantage. Tahiti ple also manufactures another travel system the 'Glider' which is manufactured from material DMP. The following information is available in respect of the year ending 31 December 2014. (i) Each Rocket requires 3.0kg of XEG. (ii) Each kilogram of XEG costs $45. (iii)The labour cost of manufacturing a 'Rocket' is estimated at $30 per unit. (iv) Variable overheads are estimated to be $28 per unit. (v) Incremental fixed costs relating to the 'Rocket' are estimated to be $20.5 million. (vi) The marketing director has estimated that a selling price of $5500 per Rocket, an annual sale volume of 400,000 units would be achieved. He has further estimated that an increase/decrease in price of $25 would cause quantity demanded to decrease/increase by 25,000 units. He has provided you with the following formulae: Price function: Pq=P0bq Total revenue (TR) function: =P0qbq2 Marginal revenue (MR) function: =P02bq Where P0= price at zero units of demand Pq= Price at q units of demand b= price: demand relationship q= units of demand. Required: (a) Calculate the profit maximizing output level for sales of the 'Rocket' and the profit that would arise from those sales during the period ending 31 December 2015. (17 marks) (b) Explain the ways in which each of the following may affect the pricing strategies that the management of Tahiti ple might adopt with the 'Rocket'. a. Cost leadership b. Product differentiation (8 marks)