1.

0 CASE STUDY

1.1 QUESTION A

1.1.1 Variables That Influence Price of a Product

There are a lots of variable that influence the price of the product. Below is the five variables
that influence price of the product:

1. Price Sensitivity
Sensitivity to price levels will vary amongst purchasers. Those that can pass on the
cost of purchases will be the best sensitive and will therefore respond more to other
elements of perceived value. For example, a business traveller will be more concerned
about the level of service in looking for a hotel than price, provided that it fits the corporate
budget. In contrast, a family on holiday are likely to be very price sensitive when choosing
an overnight stay.

2. Product Cost
The most important factor affecting the price of a product is its cost. Product cost
refers to the total of fixed costs, variable costs and semi variable costs incurred during the
production, distribution and selling of the product. Fixed costs are those costs which
remain fixed at all the levels of production or sales. Variable costs refer to the costs which
are directly related to the levels of production or sales. For example, costs of raw material,
labour costs etc. Semi variable costs are those which change with the level of activity but
not in direct proportion. The price for a commodity is determined on the basis of the total
cost. So sometimes, while entering a new market or launching a new product, business
firm has to keep its price below the cost level, it is necessary for a firm to cover more than
its total cost if it wants to survive competition.

3. Economic Condition
The inflationary or deflationary tendency affects pricing. In recession period, the
prices are reduced to a sizeable extent to maintain the level of turnover. On the other hand,
the prices are increased in boom period to cover the increasing cost of production and
distribution. To meet the changes in demand, price etc.

For instance, the marketer may have to consider the economic condition prevailing
in the market while fixing the prices. At the time of recession, the consumer may have less
money to spend, so the marketer may reduce the prices in order to influence the buying
decision of the consumers.

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4. Competitors
Competitive conditions affect the pricing decisions. Competition is a crucial factor
in price determination. A firm can fix any price for its product if the degree of competition
is low. While fixing the price of the product, the firm needs to study the degree of competi-
tion in the market. If there is high competition, the prices may be kept low to effectively
face the competition, and if competition is low, the prices may be kept high. However,
when the level of competition is very high, the price of a product is determined on the basis
of price of competitors products, their features and quality.

5. Suppliers
Suppliers of raw materials and other goods can have a significant effect on the
price of a product. If the price of cotton goes up, the increase is passed on by suppliers
to manufacturers. Manufacturers, in turn, pass it on to consumers.
Sometimes, however, when a manufacturer appears to be making large profits on
a particular product, suppliers will attempt to make profits by charging more for their
supplies. In other words, the price of a finished product is intimately linked up with the
price of the raw materials. Scarcity or abundance of the raw materials also determines
pricing.

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1.1.2 Variables That Influence Demand of a Product
There are a lots of variable that influence the demand of the product. Below is the five
variables that influence demand of the product:

1. The Consumers Level of Income

The demand for goods also depends upon the incomes of the people. The greater
the incomes of the people, the greater will be their demand for goods. In drawing the
demand schedule or the demand curve for a good we take income of the people as given
and constant. The greater income means the greater purchasing power. Therefore, when
incomes of the people increase, they can afford to buy more. It is because of this reason
that increase in income has a positive effect on the demand for a good.
When the incomes of the people fall, they would demand less of a good and as a
result the demand curve will shift downward. For instance, as a result of economic growth
in India the incomes of the people have greatly increased owing to the large investment
expenditure on the development schemes by the Government and the private sector.
As a result of this increase in incomes, the demand for good grains and other
consumer goods has greatly increased. Likewise, when because of drought in a year the
agriculture production greatly falls, the incomes of the farmers decline. As a result of the
decline in incomes of the farmers, they will demand less of the cotton cloth and other
manufactured products.

2. The Price of Related Goods

The demand for a good is also affected by the prices of other goods, especially
those which are related to it as substitutes or complements. When we draw the demand
schedule or the demand curve for a good we take the prices of the related goods as
remaining constant Therefore, when the prices of the related goods, substitutes or
complements change, the whole demand curve would change its position. It will shift
upward or downward as the case may be. When the price of a substitute for a good falls,
the demand for that good will decline and when the price of the substitute rises, the
demand for that good will increase.
For example, when price of tea and incomes of the people remain the same but the
price of coffee falls, the consumers would demand less of tea than before. Tea and coffee
are very close substitutes. Therefore, when coffee becomes cheaper, the consumers
substitute coffee for tea and as a result the demand for tea declines. The goods which are
complementary with each other, the fall in the price of any of them would favorably affect
the demand for the other.
For instance, if price of milk falls, the demand for sugar would also be favorably
affected. When people would take more milk, the demand for sugar will also increase.

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 Likewise, when the price of cars falls, the quantity demanded of them would increase which
in turn will increase the demand for petrol.

3. The Taste and Preferences of Consumers

An important factor which determines the demand for a good is the tastes and
preferences of the consumers for it. A good for which consumers tastes and preferences
are greater, its demand would be large and its demand curve will therefore lie at a higher
level. Peoples tastes and preferences for various goods often change and as a result
there is change in demand for them.
The changes in demand for various goods occur due to the changes in fashion and
also due to the pressure of advertisements by the manufacturers and sellers of different
products. On the contrary, when certain goods go out of fashion or peoples tastes and
preferences no longer remain favourable to them, the demand for them decreases.

4. The Consumers Expectations

Another factor which influences the demand for goods is consumers expectations
with regard to future prices of the goods. If due to some reason, consumers expect that in
the near future prices of the goods would rise, then in the present they would demand
greater quantities of the goods so that in the future they should not have to pay higher
prices. Similarly, when the consumers expect that in the future the prices of goods will fall,
then in the present they will postpone a part of the consumption of goods with the result
that their present demand for goods will decrease.

5. The Number of Consumers in The Market

The market demand for a good is obtained by adding up the individual demands of
the present as well as prospective consumers of a good at various possible prices. The
greater the number of consumers of a good, the greater the market demand for it.
Now, the question arises on what factors the number of consumers for a good
depends. If the consumers substitute one good for another, then the number of consumers
for the good which has been substituted by the other will decline and for the good which
has been used in place of the others, the number of consumers will increase.
Besides, when the seller of a good succeeds in finding out new markets for his
good and as a result the market for his good expands the number of consumers for that
good will increase. Another important cause for the increase in the number of consumers
is the growth in population. For instance, in India the demand for many essential goods,
especially food grains, has increased because of the increase in the population of the
country and the resultant increase in the number of consumers for them.

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1.2 QUESTION B

1.2.1 FULL COST METHOD

Full cost plus pricing is a price setting method under which you add together the direct
material cost, direct labour cost, selling and administrative costs, and overhead costs for a
product, and add to it a markup percentage (to create a profit margin) in order to derive the
price of the product. The pricing formula is:

Total production costs + Selling and administration costs + Markup

Number of units expected to sell

This method is most commonly used in situations where products and services are
provided based on the specific requirements of the customer. Thus, there is reduced
competitive pressure and no standardized product being provided. The method may also be
used to set long-term prices that are sufficiently high to ensure a profit after all costs have
been incurred.

FULL COST METHOD PRICING

Volume (units) 14,000 11,000
Cost: RM RM
Direct Material AA 7.20 8.00
Direct Material BB 4.50 5.00
Direct Labour:
Assembly Department (RM2 per hour) 9.00 10.00
Finishing Department (RM6 per hour) 10.80 12.00
Production Overhead:
Variable 10.80 12.00
Fixed 4.00 4.00
Non-Production Overhead:
Selling & Distribution:
Fixed 2.00 2.00
Variable 2.70 3.00
Additional Fixed Production 1.07 0.00
Fixed Administrative Overhead 2.50 3.18
Total Cost per unit 54.57 59.18
20% of Margin Profit 13.64 14.80
Selling Price per unit 68.21 73.98

Figure 1.1: Calculation of Full Cost Method

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 In Figure 1.1, it shows the calculation of full cost method. In additional information, it
states that 60% of selling and distribution overheads are variable costs. It means here, the
other 40% of selling and distribution overheads are fixed costs.

i) Calculation of selling and distribution overheads:

Selling and distribution overheads:

Variable (RM5 x 60%) RM3.00
Fixed (RM5 x 40%) RM2.00
Total RM5.00

Besides that, it also states that the production overhead are absorbed based on total
direct labour hours. The total of direct labour hour is RM8. The calculation of total labour hour
are as follow:

i) Firstly, compute the total labour hour:

Direct Labour Hour:

Assembly department RM2
Finishing department RM6
Total RM8

ii) Secondly, convert production overhead per hour to production overhead per unit:

Production Overhead:
Variable (RM8 x RM1.50) RM12
Fixed (RM8 x RM0.50) RM4
Total RM16

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 Furthermore, it also states that it is estimated that when output is equal to, or greater
than, 12,000 units the variable costs will reduce by 10%. In this case, all the variable costs for
the sales revenue of RM840,000 will be reduced by 10% since it has the output of 14,000
which is greater than 12,000. Hence, the variable costs include direct materials, direct labour,
production overhead and non-production overhead will be reduced by 10% as follows:

i) Calculation of the reduction of 10%

Direct material AA (RM8 x 90%) RM7.20

Direct material BB (RM5 x 90%) RM4.50
Direct labour:
Assembly department (RM10 x 90%) RM9.00
Finishing department (RM12 x 90%) RM10.80
Production overhead:
Variable (RM12 x 90%) RM10.80
Non-production overhead:
Selling & distribution
Variable (RM3 x 90%) RM2.70

Besides that, there is additional fixed production overhead of RM15,000 will be

incurred if production exceed 12,000 units and fixed administrative overhead is estimated to
be RM35,000 for SanyG Production.

For the production exceed 12,000 units, the additional fixed production will be incurred
to the output of 14,000 units which is amounted to RM1.07. The additional fixed production
overhead of RM1.07 per unit is derived from the additional fixed production overhead of
RM15,000 is divided by 14,000 units. So, we will get RM1.07 per unit.

Lastly, for the fixed administrative overhead is estimated to be RM35,000 will be

divided by 14,000 units. The calculation is similar to the additional fixed production before.

After sum up all of the full cost, the selling price will be determine with profit margin given
which is 20% according the basis given:

14,000 units: 11,000 units:

20% x RM54.57 20% x RM50
100% - 20% 100% - 20%

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1.2.2 MARGINAL COST PRICING
Marginal cost pricing is the practice of setting the price of a product at or slightly above
the variable cost to produce it. This approach typically relates to short-term price setting
situations. This situation usually arises in one of two circumstances:

A company has a small amount of remaining unused production capacity available that
it wishes to use.
A company is unable to sell at a higher price.

The first scenario is one in which a company is more likely to be financially healthy - it
simply wishes to maximize its profitability with a few more unit sales. The second scenario is
one of desperation, where a company can achieve sales by no other means. In either case,
the sales are intended to be on an incremental basis, they are not intended to be a long-term
pricing strategy, since prices set this low cannot be expected to offset the fixed costs of a
business. The variable cost of a product is usually only the direct materials required to build
it. Direct labour is rarely completely variable, since a minimum number of people are required
to crew a production line, irrespective of the number of units produced.

Below shows the calculation in marginal cost pricing for BIG EYES SDN BHD:

MARGINAL METHOD PRICING

Volume (units) 14,000 11,000
Cost: RM RM
Direct Material AA 7.20 8.00
Direct Material BB 4.50 5.00
Direct Labour:
Assembly Department (RM2 per hour) 9.00 10.00
Finishing Department (RM6 per hour) 10.80 12.00
Production Overhead:
Variable 10.80 12.00
Fixed 0.00 0.00
Non-Production Overhead:
Selling & Distribution:
Fixed 0.00 0.00
Variable 2.70 3.00
Additional Fixed Production 0.00 0.00
Fixed Administrative Overhead 0.00 0.00
Total Cost per unit 45.00 50.00
25% of Markup 11.25 12.50
Selling Price per unit 56.25 62.50

Figure 1. 2: Calculation of Marginal Costing Method

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 In Figure 1.2, it shows full calculation of marginal costing method. In this method, we
only compute the variable cost. In additional information, it states that 60% of selling and
distribution overheads are variable costs. It means here, the other 40% of selling and
distribution overheads are fixed costs where we do not need to compute in this method.

ii) Calculation of selling and distribution overheads:

Selling and distribution overheads:

Variable (RM5 x 60%) RM3.00
Fixed (RM5 x 40%) RM2.00
Total RM5.00

Besides that, it also states that the production overhead are absorbed based on total
direct labour hours. The total of direct labour hour is RM8. The calculation of total labour hour
are as follow:

iii) Firstly, compute the total labour hour:

Direct Labour Hour:

Assembly department RM2
Finishing department RM6
Total RM8

iv) Secondly, convert production overhead per hour to production overhead per unit:

Production Overhead:
Variable (RM8 x RM1.50) RM12
Fixed (RM8 x RM0.50) RM4
Total RM16

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 Furthermore, it also states that it is estimated that when output is equal to, or greater
than, 12,000 units the variable costs will reduce by 10%. In this case, all the variable costs for
the sales revenue of RM770,000 do not need to reduce 10% since it has the output of 11,000
which is lower than 12,000. Hence, the variable costs include direct materials, direct labour,
production overhead and non-production overhead will be not reduced by 10%. So, the
variable costs will be maintained.

Besides that, there is additional fixed production overhead of RM15,000 will be

incurred if production exceed 12,000 units and fixed administrative overhead is estimated to
be RM35,000 for SanyG Production. For the production exceed 12,000 units, the additional
fixed production will not be incurred since it has the output of 11,000 units which is lower than
12,000 units. Lastly, for the fixed administrative overhead is estimated to be RM35,000 will be
divided by 11,000 units. The calculation is similar to the additional fixed production before.

After sum up all of the variable cost, the selling price will be determine with profit markup given
which is 25% according the basis given:

14,000 units: 11,000 units:

RM45.00 x 125% = RM56.25 RM50.00 x 125% = RM62.50

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1.3 QUESTION C

In our opinion, we suggest the company to adopt the cost based pricing as a pricing
strategy in addition to the traditional method. This is because cost based pricing involves the
determination of all fixed and variable costs associated with a product or service. After the
total costs attributable to the product or service have been determined, usually managers add
a desired profit margin to each unit such as a 5 or 10 percent markup. In this case, this markup
can be set at a fixed percentage such as 25%. If a given good will cost RM60 to develop, a
perfect cost-based pricing would be to sell it at RM60. A cost-plus pricing model at 25% would
be to sell the product at RM75.

If we look more in-depth, this method is a simple and fairly straightforward, where the
organization understands the operation costs of producing a given good and price that good
as close to this cost level as possible. It requires only that managers study financial and
accounting records to determine prices. This pricing approach does not involve examining the
market or considering the competition and other factors that might have an impact on pricing.

Besides, fixed cost changes over time for the simple reason that each additional unit
produced will lower the average cost per unit relative to fixed investments. For instance, the
revenue of 14,000 units of SanyG product is RM840,000. At the maximum capacity, this
product will cost RM50 per unit. However, the demand is not high enough to produce at this
capacity. Instead, it is only produce 11,000 units a year. Now the cost per unit is RM40.

The variable cost is consistent for each new unit, and as a result is not sensitive to
overall volume (in most cases). What this means is that producing 1 unit will cost RM50, and
producing 10 units will cost RM500, 100 units RM5,000. Indeed, sensitivity to volume is often
one of economy of scale, which is to say that purchasing inputs for production may even
become cheaper the higher the quantity that is produced. As a result, variable costs and
quantity have a very different relationship than fixed costs and quantity.

Overall, when a company decides to price goods based on cost, it is important that the
internal mechanisms of measurement for fixed, variable, and indirect inputs are highly
accurate and developed. This cost method is often considered a low-cost method, as the firm
is attempting to forward as much value as possible to the consumer. This model is best for
organizations working to compete on price, and striving for optimal efficiency in the production
process.

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1.4 QUESTION D

1.4.1 Net Income Based on Market Research

NET INCOME BASED ON MARKET RESEARCH

Market Research

14,000 11,000
Volume (units)
RM RM RM RM

Revenue 840,000 770,000

Expenses:

Direct Material AA 100,800 88,000

Direct Material BB 63,000 55,000

Direct Labour:

Assembly Department (RM2 per hour) 126,000 110,000

Finishing Department (RM6 per hour) 151,200 132,000

Production Overhead:

Variable 151,200 132,000

Fixed 56,000 44,000

Non-Production Overhead:

Selling & Distribution:

Fixed 28,000 22,000

Variable 37,800 33,000

Additional Fixed Production 14,980 0

Fixed Administrative Overhead 35,000 34,980

Total Expenses 763,980 650,980

Net Income 76,020 119,020

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1.4.2 Net Income Based on Cost Accounting Approach

NET INCOME BASED ON COST ACCOUNTING APPROACH

Cost Accounting Approach

14,000 11,000
Volume (units)
RM RM RM RM

Revenue 954,940 813,780

Expenses:

Direct Material AA 100,800 88,000

Direct Material BB 63,000 55,000

Direct Labour:

Assembly Department (RM2 per hour) 126,000 110,000

Finishing Department (RM6 per hour) 151,200 132,000

Production Overhead:

Variable 151,200 132,000

Fixed 56,000 44,000

Non-Production Overhead:

Selling & Distribution:

Fixed 28,000 22,000

Variable 37,800 33,000

Additional Fixed Production 14,980 0

Fixed Administrative Overhead 35,000 34,980

Total Expenses 763,980 650,980

Net Income 190,960 162,800

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2.0 CONCLUSION

As a conclusion, there are some factors that influence a price and demand of a product.
The factors that influence a price of a product includes price sensitivity, product cost, economic
condition, competitors and suppliers. While, the factors that influence a demand of a product
includes the consumers level of income, the price of related goods, the taste and preferences
of consumers, the consumers expectations and the number of consumers in the market.

We also have prepared a detail report in setting up the selling price using cost
accounting approaches which is full cost method and marginal cost pricing. In the report, we
clearly disclose the proposed selling price based on traditional costing method and the
arguments of both methods.

Besides, we had suggested the company to adopt the cost based pricing as a pricing
strategy in addition to the traditional method. Cost based pricing involves the determination of
all fixed and variable costs associated with a product or service.

Furthermore, we had discussed about the computation of the selling price for both cost
accounting approach and market research approach. In our opinion, the company should
choose the cost accounting approach which is the selling price for the sales volume of 14,000
units and 11,000 units are RM68.21 and RM73.98. This is because, it generates more net
income than the market research approach which is RM190,960 for the sales volume of
14,000 units and RM162,800 for the sales volume of 11,000 units.

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3.0 REFERENCES

1. Ghose, S. (2010). Pricing Decisions: Internal & External Factors.

Retrieved from http://www.yourarticlelibrary.com/marketing/pricing/pricing-
decisions-internal-and-external-factors-with-diagram/50888/

2. Singh, J. (2011). 6 Important Factors That Influence the Demand of Goods.

Retrieved from http://www.economicsdiscussion.net/essays/economics/6-
important-factors-that-influence-the-demand-of-goods/926

3. Bragg, S. (2009). Accounting Tools. Full Cost Plus Pricing.

Retrieved from http://www.accountingtools.com/full-cost-plus-pricing

4. Reeves, C. (2011). 8 Pricing Strategies To Use On Your Product, Service Or

Workshop.
Retrieved from https://fizzle.co/sparkline/7-pricing-strategies

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