Question 3

Dallas Ltd, a new start-up company, has successfully developed a new ultra-light mobile phone that comes with a 20-megapixel front and rear camera, 512 gigabyte of storage and has a 50% longer battery life than all the other mobile phones currently sold in the market.

Given that the company has already incurred research and development costs of 5 million, it wants to ensure that the price it will charge for the product is set at the right level.

To support with the pricing decision, the management accountant of Dallas Ltd has provided in the table below the budgeted production costs at various levels of activity. Within this range of activity, there are no step-up in fixed costs.

Annual Production (units)	4,000	7,500	10,000	12,000
Production Costs
Direct Material	480,000	900,000	1,200,000	1,440,000
Direct Labour	360,000	675,000	900,000	1,080,000
Overheads	1,380,000	1,537,500	1,650,000	1,740,000

Dallas Ltd plans to produce and sell 6,000 units of the product during the first year and non-production costs, all of which are fixed, will be 500,000. The company does not produce or sell any other products.

REQUIRED

(a) Calculate the selling price that Dallas Ltd will set if it uses a marginal cost-plus pricing policy and applies a 200% mark-up to the marginal cost (variable cost) of the product.

(b) Calculate the selling price that Dallas Ltd will set if it uses a full cost-plus pricing policy and applies a 100% mark-up to the full production cost of the product.