1. The managing director of Zambia plc has devolved some decision making to operating divisions but wants to be sure that decisions will be in line with group policy. In line with this he is investigating a recent decision to increase the price of the only product of Southern division of K14.50 per unit due to rising cots..

The following information and estimates were available for the management of Southern division.

1. Last year 75 000 units were sold at K12 each with a total unit cost of K9 of which K6 were variable costs.
2. For the year ahead the following cost and demand estimates have been made.

Unit variable costs

Pessimist Probability 0.15 K7.00 per unit

Most likely Probability 0.65 K6.50 per unit

Optimistic Probability 0.20 K6.20 per unit

Total fixed costs

Pessimist Probability 0.30 increase by 50 %

Most likely Probability 0.50 increase by 25 %

Optimistic Probability 0.20 increase by 10 %

Demand estimates at various prices (units)

Price per unit K13.50 K14.50

Pessimist Probability 0.30 45 000 35 000

Most likely Probability 0.50 45 000 55 000

Optimistic Probability 0.20 70 000 68 000

(unit variable costs, fixed costs and demand estimates are statistically independent)

For this type of decision the group has decided9u

That the option should be chosen which has the highest expected outcome with at least an 80 % chance of breaking even.

Required:

1. Assess whether the decision was made in accordance with group guidelines (30 marks)

2. Comment on the estimates for the decision and describe what other factors might have been considered.

(10 marks