Richard Company Limited manufactures and distributes a new drug (Classic) which relieves tension and reduces inhibitions. The

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Question:

Richard Company Limited manufactures and distributes a new drug (Classic) which relieves tension and reduces inhibitions. The company’s target market is the entertainment industry in the United Kingdom. The company prices the drug at full cost plus 100%.

The current variable costs of production are as follow: Ingredient ‘X’: 8 mgs @ £10 per mg Labour: 5 minutes @£80 per hour Ampoules: 1 @ £1.50 per ampoule.

The company’s fixed cost (which includes the cost of distribution) are currently £320,000 per annum and absorbed based on budgeted production for the year.

The company is currently setting the price of the drug for the coming year and wishes to take into account expected price increases attached to the various elements of cost.

These are as follows: Element of cost Expected price increase Ingredients ‘X’ 10% Labour rate 50% Ampoules 33 1/3% Fixed costs 12 1/2%

The budgeted figure of the company’s production and sales for the coming year is 9,000 units of Classic drug. Having received the projected profit figure for the coming year, the CEO has asked the market protection unit to help in producing a more sophisticated approach to pricing. The unit has investigated the market and believes that, with some influence being exercised on clients, the following demand pattern will emerge: Selling price Demand £ Units 200 17,000 220 16,000 240 15,000 260 11,000 280 9,000 300 7,000 You are required to calculate:

a) The selling price of Classic drug for the coming year on the company’s usual basis

b) The company’s profit at the budgeted level of activity. The break-even point in units and sales volume.

c) The profit /volume ratio. The maximum amount that the company should be prepared to spend advertising to increase sales to 10,000 units

d) The optimal selling price and production level (with supporting calculations) assuming that the demand pattern shown above is accurate. The additional profit (if any) compared to the selling price calculated in (a) above.