Z Ltd is considering various product pricing and material purchasing options with regard to a new product it has in development. Estimates of demand and costs are as follows:

Each unit requires 3kg of material and because of storage problems any unused material must be sold at £1 per kg. The sole suppliers of the material offer three purchase options, which must be decided at the outset, as follows:
(i) Any quantity at £3 per kg, or
(ii) A price of £2.75 per kg for a minimum quantity of 50 000 kg, or
(iii) A price of £2.50 per kg for a minimum quantity of 70 000 kg. You are required, assuming that the company is risk neutral, to
(a) Prepare calculations to show what pricing and purchasing decisions the company should make, clearly indicating the recommended decisions;
(b) Calculate the maximum price you would pay for perfect information as to whether the demand would be optimistic or most likely pessimistic.

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If selling price per unit is £15 per unit Sales volume (000 units) £20 per unit Sales volume (000 units) Forecasts Probability Optimistic Most likely Pessimistic Variable manufacturing 0.3 0.5 0.2 36 28 18 28 23 13 costs (excluding materials) per unit E3 53 Advertising and selling £25 000 £40 000 £96 000 £40 000 costs General fixed costs