University of Technology, Jamaica

College of Business and Management

Performance Management for Accountants: ACC3018

Mrs. Jacqueline Samuda

Assessment 2

Name: Janielle Lambert

ID#: 1903714
QUESTION 1 – PRICING 25 MARKS

Tahiti plc is a well-established manufacturer of high-quality consumer durables. The company has
recently developed a state of the art ‘travel system’ i.e., baby carriage for infant children. The travel
system, named the ‘Rocket’ is manufactured from a rare substance, XEG, which gives superior strength
to any travel system that is currently on the market. The marketing director believes that the fact that
the ‘Rocket’ weighs less than half of the weight of all currently available travel systems will give the
company a considerable competitive advantage. Tahiti plc also manufactures another travel system the
‘Glider’ which is manufactured from material DMP.

The following information is available in respect of the year ending 31 December 2014.

(i) Each Rocket requires 3.0 kg of XEG.

(ii) Each kilogram of XEG costs $45.

(iii) The labour cost of manufacturing a ‘Rocket’ is estimated at $30 per unit.

(iv) Variable overheads are estimated to be $28 per unit.

(v) Incremental fixed costs relating to the ‘Rocket’ are estimated to be $20.5 million.

(vi) The marketing director has estimated that a selling price of $500 per Rocket, an annual sale
volume of 400,000 units would be achieved. He has further estimated that an increase/decrease
in price of $25 would cause quantity demanded to decrease/increase by 25,000 units. He has
provided you with the following formulae:

Price function: Pq = P0 – bq

Total revenue (TR) function: = P0q – bq2

Marginal revenue (MR) function: = P0 -2bq

Where

P0 = price at zero units of demand

Pq = Price at q units of demand

b = price: demand relationship

q = units of demand.

Required:

(a) Calculate the profit maximizing output level for sales of the ‘Rocket’ and the profit that would
arise from those sales during the period ending 31 December 2015.

(17 marks)
Marginal Cost = (3.0kg * $45) = $135

Labour Cost = $30

Variable Overhead = $28

Marginal Cost = $193 per unit

Step 1: Determine the value for b

Change in price/ Change in Demand = $25/25,000 units

B = 0.001

Step 2: Determine the Value of A (above this price nothing will sell)

$500 = a-(0.001 * 400,000units)

$500 = a – 400

$500 + 400 = 900

a = 900

Step 3:

Marginal Cost = Marginal Revenue

$193 = 900 – (2*0.001*Q)

$193 = 900 – 0.002Q

900 – 193 = 707 = 0.002Q

707/0.002 = 0.002Q/0.002

Q = 353,500 units

Step 4:

Demand Equation = P = 900 – 0.001Q (Price Function Formula)

P = 900 – 0.001 (353,500)

P = 900 – 353.5

P = $546.5

Contribution Margin = $546.5 - $193 = $353.5

353,500 * $353.5 = 124,962,250 - $20,500,000 = $104,462,250

(b) Explain the ways in which each of the following may affect the pricing strategies that the
management of Tahiti plc might adopt with the ‘Rocket’.

a. Cost leadership

b. Product differentiation (8 marks)