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PRICING AND PRICING STRATEGIES

1 Sellaway Ltd. manufactures and markets two products A and B, the demand in the
market of which fluctuates with the price quoted. As a result of the deliberations of its
recent Sales Conference, the following data was agreed upon as a working basis:
Product
A
B
Selling price per unit (Rs.)
32
30
28
22
20
18
Expected demand per month (Nos.) 900
1,000 1,500 1,600 2,000 3,000
8 labour hours are required to produce Product A and 4 labour hours to produce
Product B and the maximum capacity of the factory is restricted to 20,000 labour
hours per month.
The cost structure is as under per unit of production:
A (Rs.)
Direct material
Direct labour
Variable overheads

4
6
10

B
(Rs.)
3
5
6

Fixed overheads are Rs. 32,400 per quarter.


You are required to compute the possible combinations and arrive at a proper price
mix for maximum profitability.
Also work out the profitable price mix in case the spare capacity can be fully utilised
to meet additional demand of the products A and B in the ration 3: 2.
(B371)
2 A small scale manufacture produces an article at the operated capacity of 10,000 units
while the normal capacity of his plant is 14,000. Working at a profit margin of 20% on
sales realization, he has formulated his budget as under:
Units
10,000
14,000
Sales realization
2,00,000
2,80,000
Variable overheads
50,000
70,000
Semi variable overheads
20,000
22,000
Fixed overheads
40,000
40,000
He gets an order for a quantity equivalent to 20% of the operated capacity and even on
this additional production profit margin is desired at the same percentage sales
realization as for production to operated capacity.
Assuming prime cost is constant per unit of production, what should be the minimum
price to realize this objective?
(B392)

3 X Ltd. having an installed capacity of 1,00,000 units of a product, is currently


operating at 70% utilization. At current levels of input prices, the FOB unit cost (after
credit for applicable export incentives) works out as follows:
Capacity utilization per cent
FOB unit cost (Rs.)
70
97
80
92
90
87
100
82
The company has received three foreign offers from different sources as under:
Source A 5,000 units at Rs. 55 per unit FOB
Source B 10,000 units at Rs. 52 per unit FOB
Source C 10,000 units at Rs. 51 per unit FOB
Advise the company as to whether any or all the export orders should be accepted or
not.
(B439)
4 U ltd manufactures two products X and Y. it is facing severe competition in the
market. The monthly sales potential in units at different selling prices as anticipated
by the sales manager are as under:
Product X
Product Y
Selling price per
Sales potential in
Selling price per
Sales potential in
unit
units
unit
units
110
5,000
78
30,000
108
7,500
77
32,000
107
8,000
75
35,000
103
8,400
72
40,000
96
9,000
69
45,000
The total costs as disclosed by the budgets of the company are as follows:
Particulars
Product X
Product Y
Output and sales per month
5,000
9,000
30,000 45,000
( units)
Total costs per month (Rs in lacs) 5
6.6
18
25.5
Labour hours needed per month
20,000
36,000 60,000 90,000
You are required to find out the selling price and units to be sold to earn maximum
profit where labour hours are available without any restrictions and only 95,000 hours
are available.
(T2.108)
5 The Park Institute of Correspondence Studies teaches wholly through the
correspondence method. This is done by the production of self-study packs, which
enable students to prepare for professional qualifications.
Each course of study was sold at the price of Rs. 15 last year and a total of 10,000
units were produced and sold. The production costs of the various courses offered by
the institute are the same.
The variable cost of producing a study course last year was:
(Rs.)

Direct materials
Direct labour
Other direct costs (mainly postage)
Variable overheads
Total variable cost

5.00
6.00
0.60
0.40
12.0
0

The fixed overhead for the institute during the year was Rs. 20,000.
During the coming year the costs of the organisation are expected to increase by the
following:
%
Direct materials
20.0
0
Direct labour
16.6
7
Other direct costs
67.0
0
Variable overheads
25.0
0
Fixed overhead
5.00
Market research has shown that when the institute increases the price of its courses to
its students, as long as the increase is kept below 17.5%, this is unlikely to have an
effect on the number of units sold. However, for every 1% rise in price above a
17.5% increase the number of units sold can be expected to fall by 2%.
For the coming year you are required to find out:
The selling price of the study courses if the number of study courses sold and the
annual profits are to remain as before.
The number of units that the organisation would have to sell if it did not change the
price charged for these, but maintained the profit level attained in the previous year.
A brief analysis of a situation where, when prices are changed the number of units
sold is affected. The data provided in the above example can be used to illustrate your
analysis.
((T1.362)
6 A ltd has developed a product which is about to be launched into the market. The
variable cost of selling the product is Rs 17 per unit. The marketing department has
estimated that at a sale price of Rs 25, annual demand would be 10,000 units.
However if the sale price is set above Rs 25, sales demand would fall by 500 units for
each Rs 0.50 increase above Rs 25. Similarly if the price is below Rs 25, demand
would increase by 500 units for each Rs 0.5 stepped reduction in price below Rs 25.
Determine the price which would maximize A profit in the next year.
(T2.193)
7 C Ltd is about to introduce a new product with the following estimates:
Price per unit in rupees
Demand in thousand units
30.00
400
31.50
380
33.00
360

34.50
340
36.00
315
37.50
280
39.00
240
Costs
Direct materials Rs 12 per unit
Direct labor Rs 3 per unit
Variable overhead Rs 3 per unit
Selling expenses 10% on sales
Fixed production overheads Rs 14,40,000
Administration expenses Rs 10,80,000
Determine the tentative selling prices of the new product to earn maximum profit
(T2.201)
Chapter: PRICING
Case 1: TATA Chemicals
Tata chemicals make a specialized chemical product Bolzene, from a specially imported
material Pyrone. To make 1 kilogram of Bolzene requires 1.5 kilogram of Pyrone.
Bolzene has a contribution margin of Rs 60 per kilogram. Tata has just received a request
to manufacture 3,000 kilograms of Seltium, which also requires Pyrone as the material
input. An analyst at Tata calculates the following costs of making 1 kilogram of Seltium
Pyrone ( 2 kilograms * Rs 40 per kilogram)
Direct manufacturing labour
Variable manufacturing overhead cost
Fixed manufacturing overhead cost allocated
Total manufacturing cost

Rs 80
40
30
50
200

Tata has adequate unused capacity to Seltium.


Issue for consideration
Suppose Tata has adequate Pyrone available to make Seltium. What is the minimum price
per kilogram that Tata should charge to manufacture Seltium.
Now suppose Pyrone is in short supply. The Pyrone used to make Seltium will reduce the
Bolzene that Tata can make and sell. What is the minimum price per kilogram that Tata
should charge to manufacture Seltium.
Case 2: Motel case
John is a managing partner of a business that has just finished building a 60 room motel.
John anticipates that he will rent these rooms for 16000 nights next year (or 16000 room
nights). All rooms are similar and will rent for the same price. John estimates the
following operating costs for next year.
Variable operating costs Rs 30 per room night

Fixed costs
Salaries and wages Rs 17,50,000
Maintenance of building and pool Rs 3,70,000
Other operating costs and administration costs Rs 14,00,000
The capital invested in the motel is Rs 96,00,000. The partnerships targeted return on
investment is 25%. John expects demand for room to be uniform throughout the year. He
plans to price the rooms at full cost plus a markup on full costs to earn the target return on
investment.
What price should john charge for a room night? What is the markup as a percentage of
the full cost of a room night?
Johns market research indicates that if the price of a room night as determined in
requirement 1 is reduced by 10%, the expected number of room nights john could rent
would increase by 10%. Should john reduce prices by 10%?
Case 3: Supreme Industries
Supreme industries, is preparing to submit a bid for a ball bearing order . sandeep
controller of the bearing division of supreme has asked rohan, the cost analyst, to prepare
the bid. To determine price, supremes policy isto mark up the full cost of the product by
10%. Sandeep tells rohan that he is keen on winning the bid and that the price he
calculates should be competitive.
Direct material Rs 4,00,000
Direct manufacturing and labour overhead costs
Design and part administration 40,000
Production order Rs 50,000
Set up Rs 55,000
Material handling Rs 65,000
General and administration Rs 90,000
Full product cost Rs 8,00,000
All direct costs and 305 of overhead costs are incremental costs of the order.
Sandeep reviews the numbers and says, your costs are way too high. You have allocated
too much overhead costs to this job. You know our fixed overhead is not going to change
if we win this order and manufacture the bearings. Rework your numbers. You have got
to make the costs lower.
Rohan verifies his numbers are correct. He knows that sandeep wants this order because
the additional revenues from the order would lead a big bonus for sandeep and the senior
divisions managers. Rohan knows that if he does not come up with a lower bid, supreme
will be very upset.
Using supreme pricing policy and based on rohan statement calculate the price supreme
would bid
Calculate the incremental cost of the order. Why do you think supreme uses full cost of
the product rather than incremental costs
Evaluate whether sandeeps suggestion to rohan to use llower cost numbers is unethical
Case 4
A small scale manufacture produces an article at the operated capacity of 10,000 units
while the normal capacity of his plant is 14,000. Working at a profit margin of 20% on
sales realization, he has formulated his budget as under:

Units
10,000
14,000
Sales realization
2,00,000
2,80,000
Variable overheads
50,000
70,000
Semi variable overheads
20,000
22,000
Fixed overheads
40,000
40,000
He gets an order for a quantity equivalent to 20% of the operated capacity and even on
this additional production profit margin is desired at the same percentage sales realization
as for production to operated capacity.
Assuming prime cost is constant per unit of production, what should be the minimum
price to realize this objective?
(B392)
Case 5
X Ltd. having an installed capacity of 1,00,000 units of a product, is currently operating
at 70% utilization. At current levels of input prices, the FOB unit cost (after credit for
applicable export incentives) works out as follows:
Capacity utilization per cent
FOB unit cost (Rs.)
70
97
80
92
90
87
100
82
The company has received three foreign offers from different sources as under:
Source A 5,000 units at Rs. 55 per unit FOB
Source B 10,000 units at Rs. 52 per unit FOB
Source C 10,000 units at Rs. 51 per unit FOB
Advise the company as to whether any or all the export orders should be accepted or not.
(B439)
Case 6
U ltd manufactures two products X and Y. it is facing severe competition in the market.
The monthly sales potential in units at different selling prices as anticipated by the sales
manager are as under:
Product X
Product Y
Selling price per
Sales potential in
Selling price per
Sales potential in
unit
units
unit
units
110
5,000
78
30,000
108
7,500
77
32,000
107
8,000
75
35,000
103
8,400
72
40,000
96
9,000
69
45,000
The total costs as disclosed by the budgets of the company are as follows:
Particulars
Product X
Product Y
Output and sales per month
5,000
9,000
30,000 45,000
( units)
Total costs per month (Rs in lacs) 5
6.6
18
25.5

Labour hours needed per month


20,000
36,000 60,000 90,000
You are required to find out the selling price and units to be sold to earn maximum profit
where labour hours are available without any restrictions and only 95,000 hours are
available.
(T2.108)