Question Five: (13marks) (B1, C3)

Ahlia Co specializes in the production of a range of air conditioning appliances for industrial premises. It is about to launch a new product, the 'Energy Buster', a unique air conditioning unit which is capable of providing unprecedented levels of air conditioning using a minimal amount of electricity. The technology used in the Energy Buster is unique so Ahlia Co has patented it so that no competitors can enter the market for two years. The company's development costs have been high and it is expected that the product will only have a five-year life cycle.

Ahlia Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Buster's launch onto the market. Demand is very responsive to price changes and research has established that for every $15 increase in price, demand would be expected to fall by 1,000 units. If the company sets the retail price at $735, only 1,000 units would be demanded.

The costs of producing each air conditioning unit are as follows:

	$
Direct materials	42
Direct labor	12	(1.5 hours at $8 per hour. See note below)
Fixed overhead	6	(based on producing 50,000 units per annum)
Total cost	60

Note. The first air conditioning unit took 1.5 hours to make and labour costs $8 per hour. A 95% learning curve is anticipated in relation to producing the unit. This is expected to finish once 100 units have been made. Pricing decisions will be based on the 100th unit of the product. The learning coefficient b = 0.0740005.

Instructions

1. What is the demand function for air conditioning units? (6 marks)
2. What is the labour cost of the 100th unit? (give your answer to two decimal places) (7 marks)