ALG Co is launching a new, innovative product on to the market and is trying to decide on the right launch price for the product. The product?s expected life is three years. Given the high level of costs which have been incurred in developing the product, ALG Co wants to ensure that it sets its price at the right level and has therefore consulted a market research company to help it do this. The research, which relates to similar but not identical products launched by other companies, has revealed that at a price of $60, annual demand would be expected to be 250 000 units. However, for every $2 increase in selling price, demand would be expected to fall by 2000 units and for every $2 decrease in selling price, demand would be expected to increase by 2000 units.A forecast of the annual production costs which would be incurred by ALG Co in relation to the new product are as follows:

Required:(a) Calculate the total variable cost per unit and total fixed overheads.(b) Calculate the optimum (profit maximizing) selling price for the new product AND calculate the resulting profit for the period.If P = a - bx then MR = a - 2bx.(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to charge on the initial launch of the product. He believes that a high price should be charged at launch so that those customers prepared to pay a higher price for the product can be ?skimmed off? first.

Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG, and recommend whether ALG should adopt this approach instead.

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Annual production (units) 200000 250000 300 000 350000 ($) ($) ($) ($) 4200 000 3600000 Direct 2400 000 3000 000 material 1800 000 2100000 Direct labour 1200000 1500 000 1400000 1700000 Overheads 1550 000 1850000