Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Explorer Ltd manufactures a range of fire pits which are sold in garden centres and supermarkets across the UK. At the
beginning of this financial year Explorer Ltd launched a new product, the 'Table Fire Pit', abbreviated TFP. This
consists of a raised square fit pit with a table section which can be fitted into the fit pit when it is not in use. Explorer Ltd
has always followed a pricing policy of cost-plus, based upon total direct costs, plus a 50% mark- up as they believe that
this 50% would be more than sufficient to cover their overheads and non-production cost. Current plans are to make
and sell 25,000 TFP. Explorer Ltd has recently employed a newly qualified management accountant and they have
identified that whilst the current approach may provide a certain level of profit it does not help the organisation achieve
profit maximisation. They have recently presented to the board an approach based upon understanding the demand
curve for the product and the management team have asked for this approach to be implemented. The organisation
commissions some market research and data obtained from this research is as follows: At a market price of £450, annual
demand for the 'Table Fire Pit' will be 25,000. When the price is changed to £350, annual demand is expected to be
35,000. The production department has provided sufficient information to the management accountants for them to
establish some standards. Each TFP requires: 5 hours of labour at the standard cost of £12 per hour, 1.5 square metre of
treated wood at £50 per square metre, 2 square metres of metal £35 per square metre and 1 metre of mesh at £20 per
metre. Variable overhead per TFP is £25.00. Indirect fixed overheads for the year are expected to be £3,000,000. The
relevant range for this level of fixed costs is up to 50,000 units. Required: Calculate the price at which Explorer Ltd will
sell the TFP based upon the current pricing policy and the profit or loss based on the current unit sales plans. Using the
market research information calculate the profit maximising price and demand for the 'TFP'. Following on from
discussions within the management team the purchasing manager believes that the Explorer Ltd will be able to
negotiate a 5% discount on the cost of Metal per square metre. Calculate the revised profit maximising price and
demand for the TPF based upon the estimated reduction in metal costs. Discuss the limitations of formula pricing. Note:
P = a - bQ/AQ and a = £(current price) + [((current quantity at current price))/(change in quantity when the price is
changed by b) £b]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9ca36a27-9ff5-4d2d-a06e-9db1a236cc21%2Fb550743e-59c7-460e-b629-7b7368f482d2%2Fy60aqx_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Explorer Ltd manufactures a range of fire pits which are sold in garden centres and supermarkets across the UK. At the
beginning of this financial year Explorer Ltd launched a new product, the 'Table Fire Pit', abbreviated TFP. This
consists of a raised square fit pit with a table section which can be fitted into the fit pit when it is not in use. Explorer Ltd
has always followed a pricing policy of cost-plus, based upon total direct costs, plus a 50% mark- up as they believe that
this 50% would be more than sufficient to cover their overheads and non-production cost. Current plans are to make
and sell 25,000 TFP. Explorer Ltd has recently employed a newly qualified management accountant and they have
identified that whilst the current approach may provide a certain level of profit it does not help the organisation achieve
profit maximisation. They have recently presented to the board an approach based upon understanding the demand
curve for the product and the management team have asked for this approach to be implemented. The organisation
commissions some market research and data obtained from this research is as follows: At a market price of £450, annual
demand for the 'Table Fire Pit' will be 25,000. When the price is changed to £350, annual demand is expected to be
35,000. The production department has provided sufficient information to the management accountants for them to
establish some standards. Each TFP requires: 5 hours of labour at the standard cost of £12 per hour, 1.5 square metre of
treated wood at £50 per square metre, 2 square metres of metal £35 per square metre and 1 metre of mesh at £20 per
metre. Variable overhead per TFP is £25.00. Indirect fixed overheads for the year are expected to be £3,000,000. The
relevant range for this level of fixed costs is up to 50,000 units. Required: Calculate the price at which Explorer Ltd will
sell the TFP based upon the current pricing policy and the profit or loss based on the current unit sales plans. Using the
market research information calculate the profit maximising price and demand for the 'TFP'. Following on from
discussions within the management team the purchasing manager believes that the Explorer Ltd will be able to
negotiate a 5% discount on the cost of Metal per square metre. Calculate the revised profit maximising price and
demand for the TPF based upon the estimated reduction in metal costs. Discuss the limitations of formula pricing. Note:
P = a - bQ/AQ and a = £(current price) + [((current quantity at current price))/(change in quantity when the price is
changed by b) £b]
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Step 1: Define Price Ceiling
VIEWStep 2: Explain the Current Pricing Policy Profit/Loss:
VIEWStep 3: Explain the Profit Maximizing Price and Demand based on Market Research
VIEWStep 4: Explain the Revised Profit Maximizing Price and Demand with Metal Cost Reduction
VIEWStep 5: Discuss the Limitations of Formula Pricing:
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