QUESTION TWO [25]

Dettol Inc sells electronic equipment and is about to launch a new product onto the market. It needs to prepare its budget for the coming year and is trying to decide whether to launch the product at a price of R30 or R35 per unit. The following information has been obtained from market research: Price per unit R30 Probability Sales volume Price per unit R35 Probability Sales volume 0.4 120 000 0.3 108 000 0.5 110 000 0.3 100 000 0.1 140 000 0.4 94 000 Additional Information (a) Variable production costs would be R12 per unit for production volumes up to and including 100 000 units each year. However, if production exceeds 100 000 units each year, the variable production cost per unit would fall to R11 for all units produced. (b) Advertising costs would be R900 000 per annum at a selling price of R30 and R970 000 per annum at a price of R35. (c) Fixed production costs would be R450 000 per annum Required: 2.1. Calculate each of the six possible profit outcomes which could arise for Dettol Inc in the coming year. (12) 2.2. Calculate the expected value of profit for each of the two price options and recommend, on this basis, which option Dettol Inc would choose. (10) 2.3. List three factors which may give rise to uncertainty when setting budgets. (3)