Ready Co sells pharmaceuticals and is about to launch a new product, DrugG onto the market....

  

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Ready Co sells pharmaceuticals and is about to launch a new product, DrugG onto the market. It needs to prepare its budget for the coming year and is trying to decide whether to launch the product at a price of $40 or $50 per unit. The following information has been obtained from market research. Price per unit $40 Probability 0.3 0.3 0.4 Notes. ● Sales Volume 120,000 110,000 140,000 Price per unit $50 Probability 0.4 0.5 0.1 Sales Volume 108,000 100,000 94,000 Variable production costs would be $15 per unit for production volumes up to and including 100,000 units each year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall to $12 for all units produced. Advertising costs would be $800,000 per annum at a selling price of $40 and $870,000 at a selling price of $50. Fixed production costs would be $350,000. Required: (a) Calculate each of the six possible profit outcomes which could arise for Ready Co in the coming year. (8 marks) (b) Calculate the expected value of profit for each of the two pricing options and recommend, on this basis, which option Ready Co should choose.(7 marks) (c) Briefly explain the maximin decision rule and the maximax decision rule. Identify Page 6 of 8 which prices should be chosen by management if they use these rules to decide which prices to charge. (6 marks) (d) Discuss two factors that may give rise to uncertainty when setting budgets. (4 marks) Ready Co sells pharmaceuticals and is about to launch a new product, DrugG onto the market. It needs to prepare its budget for the coming year and is trying to decide whether to launch the product at a price of $40 or $50 per unit. The following information has been obtained from market research. Price per unit $40 Probability 0.3 0.3 0.4 Notes. ● Sales Volume 120,000 110,000 140,000 Price per unit $50 Probability 0.4 0.5 0.1 Sales Volume 108,000 100,000 94,000 Variable production costs would be $15 per unit for production volumes up to and including 100,000 units each year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall to $12 for all units produced. Advertising costs would be $800,000 per annum at a selling price of $40 and $870,000 at a selling price of $50. Fixed production costs would be $350,000. Required: (a) Calculate each of the six possible profit outcomes which could arise for Ready Co in the coming year. (8 marks) (b) Calculate the expected value of profit for each of the two pricing options and recommend, on this basis, which option Ready Co should choose.(7 marks) (c) Briefly explain the maximin decision rule and the maximax decision rule. Identify Page 6 of 8 which prices should be chosen by management if they use these rules to decide which prices to charge. (6 marks) (d) Discuss two factors that may give rise to uncertainty when setting budgets. (4 marks)

Answer rating: 100% (QA)

Solution a Profit Out Comed Price PerUnit 50 Price Per Unit 452 129000 11900 149000 108000 109000 94... View the full answer