STRONGBOX MOVERS LIMITED (SML) provides high quality professional relocations services to individual and corporate clients. SML clients range from well-established corporations to private individuals across New Zealand. SML's strategic aim is to be the top-rated relocation specialist with a wide range of services tailored to different clients. The company prides itself as the leading experienced mover that helps clients relocate with peace of mind. SML earned a favourable reputation for offering high-quality professional service using the combination of technological power and a highly skilled and agile workforce. The company has enjoyed a steady revenue increase at an average of 8% per year in the last 10 years. However, this may not be sustainable moving forward as the impact of competition coupled with national disruption due to lockdowns in the last 18 months has resulted in a significant reduction in the number of clients seeking SML services. The estimate for next year's budget shows that SML expect to provide 150,000 hours of relocation services at a variable cost, including materials of $40 per hour. The firm's fixed costs, which exclude the cost of financing are expected to be $1,800,000 per year. SML absorbs fixed costs based on budgeted hours of relocation services and set prices for its services at budgeted full cost-plus 10%. The 10 percent mark-up covers various cost items, including the cost of financing (or the required rate of return). The management of SML, in a recent review of the company's operating environment, acknowledged that SML has come under severe competition pressure to reduce its prices to match rival companies offering discount in the market. SML management is concerned about this development and is therefore seeking advice on how the company should set its prices for the coming year. The company's accountant, John Whyte has suggested that the current method of calculating prices should be replaced with a calculation based on SML's required rate of return. He explains that total capital employed will average $5,000,000 throughout the year and SML has a target return on capital employed (ROCE) of 12%. On the other hand, the marketing manager, Esther Hills claims that both pricing methods are inappropriate in the current uncertain and competitive environment and has supplied the following estimates of demand levels at alternative prices

Price per Hour Demand (in Hours)

$56.00 150,000

$57.00 140,000

$58.00 130,000

$59.00 100,000

$60.00 80,000

SML could meet any of these demand levels with no change in variable costs per hour or total fixed costs. Esther suggests that these demand estimates are used to set a price that will maximise profits.

Prepare a report to the management of SML, advising them on the most appropriate pricing strategy for the company.

(a) Calculate the price per hour of relocation service if SML continues to price its services at full costplus 10% AND outline THREE advantages of the cost-plus pricing method.

(b) Calculate the price per hour of relocation services if SML takes John Whyte's advice and moves to rate of return pricing AND mention THREE advantages of this method compared to SML's current cost-plus method of pricing.

(c) Calculate the price per hour of relocation services if SML takes Esther's advice and uses the predicted demand to set a price that maximises profits AND calculate the expected profit and ROCE that this price will yield if demand predictions prove to be reliable.

(d) Discuss the benefits and limitations of the pricing method used in (c) compared to the other methods used in (a) and (b) above.

(e) Recommend appropriate steps that the management need to consider with respect to the most appropriate price to use for the coming year AND provide TWO reasons for recommending this price. In making your recommendations highlight the current impact of lockdowns on your suggested options