Dexter Ltd has successfully developed a new product which it plans to launch in the market within the next few weeks. Given the high research and development costs incurred, the company wants to ensure that the price it will charge for the product is set at the right level.
Research conducted by the marketing division revealed that if the price is set at £75, annual demand is expected to be 50,000 units. However, for every £2 increase in selling price, demand would be expected to fall by 4,000 units and for every £2 decrease in selling price, demand would be expected to increase by 4,000 units.
The management accountant of Dexter Ltd has produced the following production costs forecast at various level of production in relation to the new product:
Annual Production (units)
50,000
75,000
100,000
125,000
Total Costs
£
£
£
£
Direct Material (£)
300,000
450,000
600,000
750,000
Direct Labour (£)
200,000
300,000
400,000
500,000
Overheads (£)
550,000
625,000
700,000
775,000
Dexter Ltd currently does not produce or sell any other products.
Required
If p = a – bq and MR = a – 2bq;
Calculate the optimum (profit maximising) selling price for the new product and the resulting profit for the period.