Question

Newcastle Division Topic: CVP. Probabilities and Target profits A meeting of senior managers at the Newcastle Division has been called to discuss the pricing strategy for a new product. Part of the discussion will focus on the problem of s volume. In the last year a significant number of new products have failed to achieve their forecast sales volumes. The financial accountant has already stated that the profit for the year-end will be lower than budget and the main reason for this is the disappointing sales of new products. A new technique for estimating the probability of achieving target sales and profits will be discussed. This requires managers to estimate demand for the new product and assign probabilities. The management accountant is in favour of this approach as she wants to avoid having a single estimate for sales. Details of pricing stategies The first strategy is to set a selling price of £170 with annual fixed costs at £22,000,000 A number of managers are in favour of this strategy as they believe it is important to reduce costs. The second strategy is too have a much higher expenditure on advertising and promotions and set a selling price of £190. With the higher selling price the annual fixed costs would increase to £27,000,000. The marketing department are very clear that greater expenditure on advertising and promotions is essential for this product. The following probability distribution has been agreed with the managers after consultation and is the same for both selling prices. A wide range of managers from all departments have agreed to this estimate. Estimated demand (units) 150,000 160.000 180,000 200,000 210,000 Estimated probability (units) 0.1 0.4 0.3 0.1 0.1 Estimated standard deviation of sales 18,547 units

Answer 1

page 2-1 Solin Sales units Demand probability Salej units 0.1 004 0.3 150,000 160,000 180,000 300,000 210,000 - Total 15,000 64.000 5H,000 20,000 21,000 i 4,000 know we can caluclate the demand and probabining Here we calu clate - Demand x Puobability: (a) 150,000 X0.1 = 15,000 (6) 160,000 X 0.4 = 64,000 (c) 180,000 X 0.3= 54,000 (d) 200,000 (e) 210,000 X0.!. - 21,000 A Total - 4,000 (sales units) .0! 20,000 : Sales Cunits ) Selling price Sales (s) 174,000 = $170 } $ 29,580,000 * Sales (s) = ales units x selling 144,000 X 140 price -

-- page:-2 - 140 170 Sales (- less variable riable cose cost - 35 Contri bution 135 given Standard deviation (units) y = 18,547 units. (9) No. of units to achive a desired profit of $ 1,500,000 = fixed cost tweniged prof it Jy contribution perunit = ($28,000,000 +8.1,500,000) / $ 135 = (174,074 units (b) Break even point cunit) : fixed cost | contribution = $a 2,000,000 / $135 162,963 units,

page: -3 . O No.of units to achieve a designed -profi' of $4,000,000 . -fixed cole +desired profit) contribution per unit = ($12,000,000 + $4,000,000) | $135 3192,593 units Know we can caluclate the Applying na mal Distribution now. Z= (X-M) Stan dard deviation (14,074 - 174,000) - 18.547 = 10.00399 7 z table wise we find the probability is 0.4984 (03) 49.84071 Apply : Normal Distribution 2=(x-4) Standard deviation b)

Ре-ч (162,963.-144,000) 18,547 -0.59510 ż table wire I find the probability -0,2459 =(1-0.2759) 2.12. Novo . (C). Applying Normal Distribution z=(x-41), Standard deviation = (192,593-174,000)' 18,547 51.0095 2 table wise I find the paobability of =015.8051 (B1) 1508.7

page1-5 Strategy:- Q) . Sales units . 154.000 selling price $190. Sales ($) = 174,000 paice Salesis) . . - sales units X selling : 174,000 X 190 33,060,000 Standard deviation (units) :18.544 units 190 35 o - Sales variable Cole Contribution .155 (a) No. Of units to achive a devidred profit .: 0f $1,500,000 | Fixed Lost to desired profit) Contribution per unit

page2-6 - $ 27,000, +$1,500,000) $155 · = 183,871 units, (6) Break even point (unit) - Fixed cost contribution ...$ 27,000,000 $ 155 174,194 units (0) No.04 units to achieve a desired poofit of $4,000,000 = (rixed cost + Desired profit ) Contribution per unit = ($97,000,000 + $ 4,000,000) : $ 155, 200,000 units

page - 7 (a) Know Applying nzimal Distribution 2 = (x-) Stan dard deviation (1831871-174,000) 18,544 ( 0.53282 z table wire I find the probability is 0.2978 -87 29.4841 . Applying Normal distribution 2= (x ) - Standard deviation = 174,194 - 144,000 18, 547 0.01015 probability is . 2 table wine : I find the 0.4958 Cel) 49.584.

Page !-8 10 . Normal Distribution z =(x-4) Standard deviation : (200,000 -174,000) 18,544 = 15401844 2 table wise P Find the probability is 010804. 81 8.1. when comparing between two pricing. Stratagies at target profit of $4,000,000 we would see that the strategy 1 (151811) | better than strategy 818.) (3) It will be difficult for the MNC to estimate the precise demand for each product as It has a wide product variety of it Ranges and has limited resources to comfort the selling price.

Page - 9 =) But if they for producto, for them in the . Compared to it's can estimate the demand this strategy will be helpfur long run and when competivas.