Question 4 Ahmad and Rahmat, founders and managers of A&R's ice cream business, are contemplating to raise the price of their ice-creams. They explain the challenges they are facing: "Each year we would break even and we needed only to do a little more business to make a profit. Then the next year we'd do a lot more business and still only break even. One day we were talking to Ahmad's dad, who was an accountant. He said, "Since you're going to make such a high-quality product instead of pumping it full of air, why don't you raise your prices? With price of RM1.20 per ice-cream cone, A&R sold 625 cones per week. Inspired by 'Everyone can fly' tag line of local airlines services, Ahmad underlined the business model. He mentioned "Our reason for going into business was that ours was going to be "ice cream for the people." Ahmad continued, "But Dad, the reason we're not making money is because we're not doing the job right. We're overscooping. We're wasting ice cream. Our labor costs are too high- we're not doing a good job of scheduling our employees. We're not running our business efficiently. Why should the customer have to pay for our mistakes?" The inefficiency in the A&R business costs twice as much as it should be. Ahmad's dad replied "You guys have to understand that's human. That's as good as people do. You can't price for doing everything exactly right. Raise your prices." Required: (a) Based on the scenario above, is it necessary for A&R's ice cream to increase its prices? Justify. (5 marks) (b) To achieve the level of efficiency as expected, the current total fixed costs of RM800 per month is maintained. Answer the following questions: i. What is the optimal total cost per cone of ice cream? (4 marks) ii. What is the maximum total target profit amount in RM) per year Ahmad and Rahmat can earn to keep the motto of "ice-cream for the people with the price kept at RM1.20 per cone? (6 marks) Ahmad argues that it would be least likely for A&R to improve the current operation and its inefficiency within 3 years. Given increase of price is necessary with no effect on demand, what will be the price per cone that A&R should charge the customers with the following cost plus pricing options: a 20% of total costs. b. 50% of variable costs. (6 marks) (c) Ahmad's dad final advice was "Raise your prices." Besides cost plus pricing option, suggest one relevant pricing strategy given the scenario of the business above for A&R managers to consider. Explain. (4 marks) [Total: 25 marks) Question 4 Ahmad and Rahmat, founders and managers of A&R's ice cream business, are contemplating to raise the price of their ice-creams. They explain the challenges they are facing: "Each year we would break even and we needed only to do a little more business to make a profit. Then the next year we'd do a lot more business and still only break even. One day we were talking to Ahmad's dad, who was an accountant. He said, "Since you're going to make such a high-quality product instead of pumping it full of air, why don't you raise your prices? With price of RM1.20 per ice-cream cone, A&R sold 625 cones per week. Inspired by 'Everyone can fly' tag line of local airlines services, Ahmad underlined the business model. He mentioned "Our reason for going into business was that ours was going to be "ice cream for the people." Ahmad continued, "But Dad, the reason we're not making money is because we're not doing the job right. We're overscooping. We're wasting ice cream. Our labor costs are too high- we're not doing a good job of scheduling our employees. We're not running our business efficiently. Why should the customer have to pay for our mistakes?" The inefficiency in the A&R business costs twice as much as it should be. Ahmad's dad replied "You guys have to understand that's human. That's as good as people do. You can't price for doing everything exactly right. Raise your prices." Required: (a) Based on the scenario above, is it necessary for A&R's ice cream to increase its prices? Justify. (5 marks) (b) To achieve the level of efficiency as expected, the current total fixed costs of RM800 per month is maintained. Answer the following questions: i. What is the optimal total cost per cone of ice cream? (4 marks) ii. What is the maximum total target profit amount in RM) per year Ahmad and Rahmat can earn to keep the motto of "ice-cream for the people with the price kept at RM1.20 per cone? (6 marks) Ahmad argues that it would be least likely for A&R to improve the current operation and its inefficiency within 3 years. Given increase of price is necessary with no effect on demand, what will be the price per cone that A&R should charge the customers with the following cost plus pricing options: a 20% of total costs. b. 50% of variable costs. (6 marks) (c) Ahmad's dad final advice was "Raise your prices." Besides cost plus pricing option, suggest one relevant pricing strategy given the scenario of the business above for A&R managers to consider. Explain. (4 marks) [Total: 25 marks)