Question Tag: Pricing Strategies

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  • 15 Marks

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

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)

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  • 15 Marks

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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  • 10 Marks

BMIS – Aug 2022 – L1 – Q4a – Finance, R&D and marketing strategies

Differentiates between penetration pricing and skimming pricing strategies and outlines the circumstances for their use.

Penetration pricing and Skimming pricing are the two main pricing strategies used by business organisations.

Required:

i) Differentiate between these two pricing strategies.
(4 marks)

ii) Outline THREE (3) circumstances for which each of these pricing strategies will be appropriate for use by a manufacturing company.
(6 marks)

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  • 15 Marks

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

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)

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  • 15 Marks

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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  • 10 Marks

BMIS – Aug 2022 – L1 – Q4a – Finance, R&D and marketing strategies

Differentiates between penetration pricing and skimming pricing strategies and outlines the circumstances for their use.

Penetration pricing and Skimming pricing are the two main pricing strategies used by business organisations.

Required:

i) Differentiate between these two pricing strategies.
(4 marks)

ii) Outline THREE (3) circumstances for which each of these pricing strategies will be appropriate for use by a manufacturing company.
(6 marks)

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