QUESTION 3

FATIMAH Berhad is about to release a new product and is deciding on the price point for the product and wishes to set a price that will maximize profits. Market research indicates that at a price point of RM150 FATIMAH will sell 500 units a month; however, should the price increase by RM5 sales will drop by 50 units per month; conversely, if price is decreased by RM5 sales will increase by 50 units. The variable cost of making the product is RM90.

REQUIRED:

a). Advise the board on the profit maximizing price that should be set and the number of units they will sell at this price. (16 Marks)

b). The production manager believes that it would be easier to use cost plus pricing. Explain the disadvantages of cost plus pricing. (3 Marks)

FATIMAH also has a new product currently being designed and the variable cost of the prototype is RM70.00. Since FATIMAH needs to earn a contribution of RM35.00 per unit at forecast sales levels, they decided to price the unit at cost of RM70.00 + RM35 and set the price at RM105. This was used for the launch price. After launch sales were far less than anticipated and it was discovered that the target market considered the product to be too expensive, they would only pay RM100 for the product.

c). What approach should FATIMAH use in order to realize a contribution of RM35.00 and a price of RM100? Explain in detail. (6 Marks)

(TOTAL: 25 MARKS)