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- 4 Marks
Question
Blasius Ltd has just decided to produce a new line of item, namely bed, that can be sold in its retail shops throughout the country. It has provided you with the following information concerning the total cost of annual production and the prices at which that production could be sold:
| Annual production units | Total cost (GH¢000) | Selling price (per unit) (GH¢) |
|---|---|---|
| 2,500 | 100.3 | 70.8 |
| 5,000 | 186.3 | 66.7 |
| 7,500 | 287.8 | 62.5 |
| 10,000 | 405.0 | 58.3 |
| 12,500 | 537.8 | 54.2 |
Required:
Determine the optimal selling price for the bed. (4 marks)
Answer
Tabulated below are the total cost and revenue figures together with profit at each activity level to determine optimal selling price. The same result has been reached by comparing marginal cost and revenue figures.
| Selling Price (GH¢) | Production and Sales | Total Revenue (GH¢000) | Total Cost (GH¢000) | Profit (GH¢000) |
|---|---|---|---|---|
| 70.8 | 2,500 | 177.00 | 100.30 | 76.70 |
| 66.7 | 5,000 | 333.50 | 186.30 | 147.20 |
| 62.5 | 7,500 | 468.75 | 287.80 | 180.95 |
| 58.3 | 10,000 | 583.00 | 405.00 | 178.00 |
| 54.2 | 12,500 | 677.50 | 537.80 | 139.70 |
It can be seen from the profit column that profit is maximized where the selling price is set at GH¢62.5, as this gives the highest profit of GH¢180.95.
- Tags: Cost Analysis, Decision Making, Optimal Pricing, Profit Maximization
- Level: Level 2
- Topic: Decision making techniques
- Series: MAY 2020
- Uploader: Dotse