MA Plc is reviewing the selling price of one of its main products, Model MA-3. A...

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MA Plc is reviewing the selling price of one of its main products, Model MA-3. A forecast of annual costs that would be incurred by the company in respect of this product at the various activity levels is shown as follows. The fixed overheads deals with facility related costs and is expected to step up by £20,000 when the production capacity exceeds 750,000 units. The regular supplier for direct materials are committed to offer a 20% discount if the company purchases at least 800,000 units. Annual production unit Direct materials Direct labour Variable overheads Fixed overheads 150,000 E000 600 1,050 930 800 400,000 £000 1,600 2,800 2,480 800 700,000 £000 2,800 4,900 4,340 800 The current selling price of the product is £55 per unit and the annual demand is forecasted to be 360,000 units at this price. Market research indicates that the level of demand would be affected by any change in the selling price. Detailed analysis from this research shows that for every £1 increase in selling price, annual demand would reduce by 30,000 units. For every £1 decreas in selling price, annual demand would increase by 30,000 units. MA Plc is reviewing the selling price of one of its main products, Model MA-3. A forecast of annual costs that would be incurred by the company in respect of this product at the various activity levels is shown as follows. The fixed overheads deals with facility related costs and is expected to step up by £20,000 when the production capacity exceeds 750,000 units. The regular supplier for direct materials are committed to offer a 20% discount if the company purchases at least 800,000 units. Annual production unit Direct materials Direct labour Variable overheads Fixed overheads 150,000 E000 600 1,050 930 800 400,000 £000 1,600 2,800 2,480 800 700,000 £000 2,800 4,900 4,340 800 The current selling price of the product is £55 per unit and the annual demand is forecasted to be 360,000 units at this price. Market research indicates that the level of demand would be affected by any change in the selling price. Detailed analysis from this research shows that for every £1 increase in selling price, annual demand would reduce by 30,000 units. For every £1 decreas in selling price, annual demand would increase by 30,000 units.

Answer rating: 100% (QA)

To determine the optimal selling price for the MA3 product we need to analyze the cost structure and the impact of changes in selling price on demand ... View the full answer