Question Tag: Price Discrimination

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MA – Nov 2018 – L2 – Q4 – Cost-volume-profit (CVP) analysis

Calculation and analysis of price discrimination strategy and its impact on contribution and profit.

Oliso Ltd manufactures and sells an executive game for two distinct markets in which it currently has a monopoly. The fixed costs of production per month are GH¢20,000, and variable costs per unit produced, and sold, are GH¢40. The monthly sales can be thought of as X, where X = X1 + X2, with X1 and X2 denoting monthly sales in their respective markets. Detailed market research has revealed the demand functions in the markets are to be as follows, with prices shown as P1 and P2:

  • Market 1: P1 = 55 − 0.05X1
  • Market 2: P2 = 200 − 0.2X2

The price is currently GH¢50 per game in both markets, and the Management Accountant believes there should be price discrimination.

Required:

a) Explain the term ‘price-discrimination’ and explain THREE (3) conditions that are necessary for the successful operation of this pricing strategy. (5 marks)

b) Calculate the price to charge in each market, and the quantity to produce (and sell) each month, to maximise profit. (4 marks)

c) Calculate the Total Monthly Contribution for each market at the price and quantities calculated in part (a) and the maximum monthly profit in total. (3 marks)

d) Write brief notes to the Management Accountant to explain how this pricing strategy would change if new competitors enter the market and suggest other pricing strategies which the business may have to consider, as well as pricing strategies that a new competitor may use. (3 marks)

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MA – Nov 2018 – L2 – Q4 – Cost-volume-profit (CVP) analysis

Calculation and analysis of price discrimination strategy and its impact on contribution and profit.

Oliso Ltd manufactures and sells an executive game for two distinct markets in which it currently has a monopoly. The fixed costs of production per month are GH¢20,000, and variable costs per unit produced, and sold, are GH¢40. The monthly sales can be thought of as X, where X = X1 + X2, with X1 and X2 denoting monthly sales in their respective markets. Detailed market research has revealed the demand functions in the markets are to be as follows, with prices shown as P1 and P2:

  • Market 1: P1 = 55 − 0.05X1
  • Market 2: P2 = 200 − 0.2X2

The price is currently GH¢50 per game in both markets, and the Management Accountant believes there should be price discrimination.

Required:

a) Explain the term ‘price-discrimination’ and explain THREE (3) conditions that are necessary for the successful operation of this pricing strategy. (5 marks)

b) Calculate the price to charge in each market, and the quantity to produce (and sell) each month, to maximise profit. (4 marks)

c) Calculate the Total Monthly Contribution for each market at the price and quantities calculated in part (a) and the maximum monthly profit in total. (3 marks)

d) Write brief notes to the Management Accountant to explain how this pricing strategy would change if new competitors enter the market and suggest other pricing strategies which the business may have to consider, as well as pricing strategies that a new competitor may use. (3 marks)

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