Microchip Manufacturers Ltd, have recently developed a microprocessor that will enable them to market a new computer chessplaying game. Development costs were in excess of f200 000, but the new product is thought to be significantly better than other currently available games. The game considered to be its nearest competitor seIls at a wholesale price of fi28. If the new game were to be offered at a similar price the Marketing Department believe about 1000 units would be sold over the next 2 years, after which it would become obsolete. However, past experience has indicated that demand would be quadrupled each time the price was cut by one half. Substantial price reductions see m possible as the variable cost of production and distribution amounts to approximately f16 per unit. The contribution analysis given in Table 6.7 indicates that a price of 02 would yield the highest contribution, although it is thought that the small sales at the highest prices would occur in a very short period following the introduction of the product.

Required:

Develop a pricing policy for this product to cover all stages of its life from initial introduction to its eventual obsolescence, indicating the contribution you would expect from each stage.

From: Certified Diploma in Accounting and Finance, Paper 2, December 1981.

Table 6.7 Price (wholesale) () Estimated Market for Microchip ('000s) Unit contribution (E) Total contribution ('000) 128 1 112 112 64 4 48 192 48 7.1 32 228 40 10.25 24 246 36 12.6 20 253 32 16 16 256 28 20.9 12 250 24 28.5 8 228 20 16 41 4 164 64 0 0