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AYB321 Strategic Management Accounting Discussion Leadership Questions Tutorial 11 Pricing & Product Mix Decisions 1. You are a management...

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AYB321 Strategic Management Accounting Discussion Leadership Questions Tutorial 11 Pricing & Product Mix Decisions 1. You are a management accountant in a firm that uses cost-plus pricing, calculated using a mark-up on variable cost. The following data relate to the budget for the next financial year: Target profit: $100,000 Variable cost per unit: $50 Fixed manufacturing costs: $50,000 S&A costs (fixed): $10,000 No units: 10,000 One of your colleagues suggests that the firm changes its cost-plus approach to a mark-up on full absorption cost rather than on variable cost, as this would enable the firm to have a lower mark-up, and therefore to be more competitive. Required: a) Calculate the current mark-up percentage on variable cost. b) Calculate what the mark-up would be on full absorption cost. c) Calculate the prices under each of the above two methods, and comment on the results. d) Evaluate your colleague’s argument. What are the advantages and disadvantages of each method? 2. You have been asked to provide advice to Dream Houses Ltd (DLH) on the way they set the prices for the houses they sell. DLH have two standard designs that they market and sell; the ‘comfort home’ for first home buyers, and the ‘luxury home’ for move-up buyers. The comfort homes are marketed in the more affordable outer suburbs of Brisbane, while the luxury homes are targeted at more affluent neighbourhoods. The variable costs of the two products are $200,000 and $360,000 respectively, and DHL apply a standard mark-up on variable cost of 40% for both products. As a result, their prices are $280,000 for the comfort homes and $504,000 for the luxury homes. DHL of finding that the luxury homes are selling steadily, but their comfort homes are not competitive at all. Required: Explain why the current pricing approach is not appropriate for these products, and recommend a different approach. In doing so, you should discuss how the firm would determine its floor and ceiling prices, and what other factors it would consider in determining the optimum price-point within these two extremes. 3. (Adapted from P20.31 in LTH) Razzle Ltd is developing a new clothes dryer, Dry Master, that it plans to sell to AYB321 Semester 2, 2012 Page 1
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coin operated laundries. Currently, the market leader is a product called DryWell, which is sold buy a competitor. The managing director of Razzle Limited, Fred Price, has engaged a market research agency to help assess the appropriate selling price for the new clothes dryer. The agency has surveyed a range of laundries and determined that the following data for the DryWell: Selling price $12,000 Installation costs $200 Yearly maintenance cost $800 Expected useful life 8 years Disposal value $0 Engineering estimates have determined that the Dry Master will entail maintenance costs of $600 per annum, and will have a useful life of eight years with the disposable value of zero. In addition, the new product will dry clothes more quickly than the DryWell and will result in softer and fluffier clothes. The value of this improved functionality to the customer is estimated at $400. Customers will need to incur average installation costs for the Dry Master of $300 per machine. Required: a) Use economic-value pricing to determine the economic value to the customer. (Ignore the time value of money.) b) The DryWell brand is well entrenched in the coin-operated laundry market. What strategic pricing option would you recommend Razzle takes in this case and why? What effect is this likely to have on the price they offer? c) The above approach implicitly takes into account customer value and competitor behaviour considerations. Briefly discuss three other factors Razzle might take into account in its pricing. *** AYB321 Semester 2, 2012 Page 2
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