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(A)

Managing Director Pricing Strategy


Managing director decided to charge the full price plus 50% margin strategy for the off the self accounting software
package. This price includes:
Full Cost 400
Margin 200
Price 600

Advantages of full cost-plus pricing:


1. It is easy to understand and easy to determine
2. Full Cost can be easily calculated
3. It does not require the price and demand relationship to calculate the price. Company aims to charge the price
that ensure the profit and cover its all cost. This price is useful for the products that are different have unique
features or prepare on the demand of the customers.
Disadvantages of full cost-plus pricing:
1. It does not consider the market price and demand relationship.
2. Full cost is calculated on the basis of the absorption costing.
3. Price may need to be adjusted according to the market conditions

RB Company
Company is charging the full cost plus pricing for the software package with the aim that this way they cover all its cost
and ensure the profits. This method help the company the easy way to calculate the price of the product and easy to
understand for the non-finance managers to make decisions. However, this price is not compatible with the market
price which results in decline the sales due to high price and profit will declined. This product might be failed to high
price as company charge the 50% margin further it depends on the customers buying power and features of the
product.
Company currently calculate the product price based on the absorption costing which uses the volume basis to
determine the overhead cost. If the overhead basis is changed so the price of the product may be changed and need to
rise the price of the product that may affect the sale of the product.

(B)
Market Skimming
Company can use the market skimming pricing method for the product when first launched in the market. In this
strategy company can offer the higher price for the product with the aim to capture the higher market share. This will
enable the company to generate higher profits in short period. Accounting software that is off the self means this not
contain much flexibility for all industries but have a standard feature that normally accountant can use. However,
market skimming strategy is only useful for RB Co if they offer further customization features along with the standard
and charge the higher price for this.

Market Penetration
Market penetration strategy in which company offer the lowest price for the product when launched for the first time.
This price is normally offer those products that have a long life so the company generate profits for the longer period.
This strategy will help the company to use penetration for the off the self-software with standard features so that
competitors cannot offer these in that price or this will be a barrier for the entry for the competitors.

(C )
Demand equation

P = a – bq
P = Price
A = Price at which demand will be zero
B = Gradient line
Q = Quantity demanded
A = 750
10
B= = 0.01
1000
P = 750 – 0.01Q

(D)
Total Cost Function TC = 1200,000 + 320Q

Total Cost Equation = Y = X +BQ

X = Fixed Cost
B = Variable Cost
Q = Quantity Demanded

Total cost equation means the profit is equal to the sales minus variable and fixed cost. In the above total cost equation
1200,000 is a fixed cost while the 320 is variable cost and Q is determined as quantity demanded.

(E )

PED and its implication on the RB Pricing Strategy

Price elasticity of demand is a tool that determined the price relation with demand. How the demand would be affected
by 1 dollar change in price. Price elasticity of demand equation as:

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
𝑃𝐸𝐷 =
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

Currently the RB Co using the full cost-plus pricing strategy which does not consider the external market price and
demand condition. However, this price may be very sensitive for the customers and if the price is lower by the company
its demand will be rise or vice versa. Company should use the optimal pricing strategy for its price so that its profit will
be maximized up to the maximum level.