X Limited has a product that has now finished its development phase and is about to be launched. The following details relate to the product over its estimated lifecycle:

Launch Growth Maturity Decline

1 year 1 year 1 year 1 year

Marketing costs (m) 5 4 2 0.5

Production cost per unit () 10.00 9.00 7.00 8.00

Production volume (millions) 3 8 12 4

The company has already incurred research and development costs of 16m, which are to be amortised over the four year life of the product.

The management team are now considering the launch price. The marketing manager is considering a low price and believes that the price should be below 10, whereas the production accountant wants to cover the costs in the launch phase, year 1.

You are required to:

a). Prepare a cost summary showing what the price needs to be if the costs in the launch phase alone are to be covered. (4 marks)

b). Prepare a cost schedule looking at costs over the whole life cycle of the product and calculate the cost per unit on this basis. (10 marks)

c). Comment on the implications of this analysis for the price at the launch phase and consider how the management team should set the price of the product during the lifetime of the product. (6 marks)

Total (20 marks)