(a) What are the differences between marginal cost pricing and full cost pricing? (b) How far is it true to...
(a) What are the differences between marginal cost pricing and full cost pricing?
(b) How far is it true to state that marginal cost pricing is a short-term strategy?
(c) A.S. Teriod Ltd makes five different products – Ceres, Eros, Hermes, Icarus and Vesta. The various costs per unit of the products are respectively: direct labour, £14, £8, £22, £18 and £26; direct materials, £8, £10, £13, £12 and £17; variable overheads, £11, £9, £16, £15 and £19.
The fixed expenses for the month of February 2018 are estimated at £8,200, and this has been allocated to the units produced as Ceres £17, Eros £13, Hermes £19, Icarus £15 and Vesta £18. The company adds 20% on to the total cost of each product by way of profit.
(i) Calculate the prices based upon full cost pricing.
(ii) Advise the company on which products to produce, if competition forces the prices to: Ceres £59, Eros £25, Hermes £80, Icarus £44 and Vesta £92.
(iii) Assuming that output for the month amounts to 100 units of each model, that fixed costs remain the same irrespective of output and that unused capacity cannot be used for other products: calculate the profit or loss if the company continued to produce the whole range at the new prices; AND if the company followed your advice in (ii) above.
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