Optim Ltd makes a single product, a washing machine. The standard cost card for a machine is:
Variable overheads 40
Output for the month is budgeted to be 5,000 units and monthly fixed overhead are expected to be $100,000. Fixed cost are expected to remain at this level if output rises to 7,500 units per month.
The company currently uses a full cost plus approach to pricing and add 100% onto the full cost per unit to calculate the selling price. However, sales volume and profit have been disappointing. Therefore, the company commissioned some market research to determine costs and volumes. The research showed that, at a price of $250 per unit, sales volume would be 6,000 per month and would reduce by 500 per month for each $10 rise in price.
a) Using the company’s current full cost plus approach to pricing, what selling price are they attempting to charge?
b) Derive the demand function and use that to calculate the monthly profit based on the cost plus approach to pricing.
c) Equate marginal revenue and marginal cost to determine profit maximizing price
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