SEPT 2011 Q1 b)
(i) If the actual direct material cost per unit were lower than expected then the effect of this would be to reduce the variable cost and hence the marginal cost per unit. There would be no change to the price equation but this would impact on the solution of the optimal selling price and quantity, the result of which would be to lower the selling price and thus increase the quantity sold. The opposite would apply if the direct material cost per unit were to increase.
(ii) Any change in the fixed overhead cost would have no effect on the optimal selling price and quantity sold.
May 2011 Q1 b)
There are many reasons why this price may not be used (candidates are expected to explain two). • There may be inaccuracies in the demand forecasts at different prices because the model assumes that demand is driven solely by price. In fact there are many different factors that influence demand; these include advertising, competitor actions and changing fashions / tastes. • The model also assumes that the relationship between price and demand is static whereas in reality it is regularly changing. • There may be inaccuracies in the determination of the marginal cost, the assumption that marginal cost equals variable cost may itself be invalid, but even if this is acceptable then the assumption that all variable costs vary with volume is unrealistic. Some of these costs may be driven by factors other than volume. Again there is an assumption the unit variable cost is unchanging once it has been determined.
May 2010 Q2)
i) (i) Selling price changes
It is likely that throughout the growth, maturity & decline phases there will be a gradual reduction in the selling price of the product, but the reasons for the reductions are different for each phase.
In the growth phase, PQ will be aware that their competitors may have purchased the product during its introduction phase and may have reverse engineered it and perhaps produced...