- 15 Marks
PM – May 2019 – L2 – Q7 – Pricing Decisions
Evaluates various pricing methods for a new product and calculates prices based on different strategies.
Question
Tetpack Nigerian Limited (TNL) produces various types of packaging products for the food industry. TNL has just introduced a new type of pack, and its marketing manager is considering how to penetrate the market with the pack. The following pricing strategies have been suggested:
i. Market skimming price
ii. Market penetration price
iii. Full cost plus price
iv. Return on investment price
v. Marginal cost plus price
The management accountant has provided the following data about the pack:
- Non-current assets needed for the production of the pack: N2,000,000
- Working capital requirements: N400,000
- Expected annual sales volume: 40,000 units
- Variable production costs: N60 per unit
- Fixed production costs: N300,000 each year
- Annual non-production costs: N100,000
- Markup:
- Full cost plus price: 25%
- Marginal cost plus price: 40%
- Target return on investment: 10% per year
Required:
a. Discuss the above pricing methods and advise when each could be used. (10 Marks)
b. Calculate what the price of the pack should be if its price is based on:
i. Full cost plus pricing (1½ Marks)
ii. Marginal cost plus pricing (1½ Marks)
iii. Return on investment pricing (2 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Cost Plus, Marginal Cost, Market Penetration, Market Skimming, Pricing Strategies, ROI
- Level: Level 2
- Topic: Pricing Decisions
- Series: MAY 2019