A bike company based in England, Raleigh Bike Inc., is planning to sell its existing inventory of Mini Bike in a new market (Scotland). Total production is expected to be 10,000 units. Allocated production costs are provided as follows:
Allocated Production Costs in E
Raw Materials 200,000
Direct Labour 300,000
Variable Overheads 50,000
Allocated Fixed Overheads 150,000
Total or Full Cost 700,000
As an accounting manager of the company, you will need to answer the following questions for chairing the Company Board Meeting.
1) Calculate the selling price (per unit) required to give a profit margin of ten percent (10%) on full cost pricing (Absorption Costing Method) as initially planned by the company. (7.5 marks)
2) Due to heavy competition in the Scottish markets, the company is planning to employ a price penetration strategy in order to enter the markets successfully. The market condition in Scotland is proved to be much worst than is originally forecasted. In addition, the company is being left with substantial unsold bike stock. What will be the penetration selling price, if the company is employing Contribution Margin Pricing (Marginal or Variable Costing Method) with a mark-up of 5% to base the price on the average variable cost. (7.5 marks)
3) As an accounting manager, evaluate which pricing strategy (1 or 2) is the best policy. Justify your answer critically to the Company Board Meeting. Hint: this is a conceptual question, calculation is not required. Higher marks will be given for rigorous answers with complete Harvard referencing. (15 marks) Total 30 marks