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Newcastle Division Pricing Strategy Analysis

The document discusses a meeting to choose a pricing strategy for a new product. Two strategies are presented: setting the price at $80 with fixed costs of $500,000 or setting it at $100 with higher advertising spending and fixed costs of $750,000. Managers agreed on a probability distribution for estimated demand. The document asks to calculate the probabilities of achieving different profit targets for each strategy and discuss how this technique could help large companies choose strategies and apply to their diverse product lines.

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Kimi Walia
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461 views2 pages

Newcastle Division Pricing Strategy Analysis

The document discusses a meeting to choose a pricing strategy for a new product. Two strategies are presented: setting the price at $80 with fixed costs of $500,000 or setting it at $100 with higher advertising spending and fixed costs of $750,000. Managers agreed on a probability distribution for estimated demand. The document asks to calculate the probabilities of achieving different profit targets for each strategy and discuss how this technique could help large companies choose strategies and apply to their diverse product lines.

Uploaded by

Kimi Walia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Case 3 Newcastle Division Topic: CVP, Probabilities and Target profits A meeting of senior managers at the Newcastle Division

has been called to discuss the pricing strategy for a new product Part of the discussion will focus on the problem of forecasting sales volume !n the last year a significant number of new products have failed to achieve their forecast sales volumes The financial accountant has already stated that the profit for the year"end will be lower than budget and the main reason for this is the disappointing sales of new products A new techni#ue for estimating the probability of achieving target sales and profits will be discussed This re#uires managers to estimate demand for the new product and assign probabilities The management accountant is in favour of this approach as she wants to avoid having a single estimate for sales Details of pricing stategies The first strategy is to set a selling price of $%&' with annual fi(ed costs at $)),''',''' A number of managers are in favour of this strategy as they believe it is important to reduce costs The second strategy is too have a much higher e(penditure on advertising and promotions and set a selling price of $%*' +ith the higher selling price the annual fi(ed costs would increase to $)&,''',''' The mar,eting department are very clear that greater e(penditure on advertising and promotions is essential for this product The following probability distribution has been agreed with the managers after consultation and is the same for both selling prices A wide range of managers from all departments have agreed to this estimate -stimated demand .units/ %0',''' %1',''' %3',''' )'',''' )%',''' -stimated probability .units/ '% '2 '4 '% '%

-stimated standard deviation of sales %3,02& units

Variable costs per unit

The managers estimate that the variable cost per unit is $40 Target Profits The target profits identified by the managers are given below The probability of the new product only achieving brea,"even is very important A profit greater than $2,''',''' is the re#uired return for the new product !f the product cannot achieve a profit greater than $2,''',''' it is very unli,ely that managers will accept it Questions Question 1 .a/ 5or both pricing strategies calculate the probability of: .i/ A profit greater than $%,0'',''' .ii/ A profit of $' .brea,"even/ .iii/ A profit greater than $2,''','''

Question 2 Assuming that the target profit for the new product is $2,''',''' discuss whether your answer to .%/ helps managers choose between the two pricing strategies Question 3 Discuss how this techni#ues can be applied to a large multinational company with a wide range of products

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