Decision Making Mock (Shriya)

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RB Co

a) Pricing strategy of managing director


1) The managing director has decided to add a 50% mark up to the budgeted full cost of the packages.
2) Ths strategy is known as Full cost Plus strategy where the director has added 50% markup on Full cost of $400 making t
3) Some of the benefits of Full Cost Plus pricing strategy are,
a) Adding a markup on Full cost ensures that all costs are incorporated into the pricing decision, which also ensures that a
b) Calculting price in such a strategy is simple and easy if costs are known and hence can be delegated to junior manageme
c) This strategy also ensures price stabilty if all competitors have similar cost structures and use similar mark up.
4) Some of the disadvantages of this pricing strategy will be as follows,
a) The method of absorbing overheads in this method si arbitrary and hence the prices arised from this method may not b
b) RB Co currently is absorbing overheads o the basis of labour hours and budgeted level of production which is lower than
c) RB Co should also know that this method of pricing does not guarantee profit because if volume of sales is low, fixed cos

b) Two alternative Pricing strategies that could have been implemented at the launch of the packages.

1) Market Skimming
Skimming basically means charging high prices for a product when it is newly launched in market in order to maximise sho
Demand for this new product is initilly inelastic
Market Skimming Pricing strategy is mostly used when the product is unique or is a new electronic product.
RB Co is producing an accounting software which they claim to be ' off the shelf ' and hence early adopters or consumers a
In such pricing strategies price of the product is high in its initial stage and then lowered in later stages of the product cycle
2) Market penetration strategy
Penetration Pricing is charging low prices for a product that is newly launched in market in order to gain acceptance of the
Once the market acceptance and market share is achieved the prices are increased.
Penetration Pricing is an alternative approach to market skimming when it comes to launchig a new product.
Penetration Pricing is used when significant economies of scale is to be achieved and the deand is highly elastic and hence

c) Straight line demand equation for the packages

P= a-b*q
where ,
a= $ 750 (price where demand is 0)
b= 0.01 (change in price to change in demand)
q= quantity
Hence,

P= 750-0.01q

d) Meaning of TC= 1,200,000+320Q

TC = 1,200,000+320Q
Above equation is a linear cost equation which can be used to estimate future costs,
The Equation is y= a+b*x
Where,
y= Total Cost = Fixed Cost + Variable Cost
a= Fixed cost per unit
b= Variable cost per uit
x= Level of activity

Fixed Cost for RB Co is $80 and hence for 15000 packages Fixed Cost = $ 1,200,000
Hence a = 1,200,000
Variable cost per unit = Full cost - Fixed Cost
Hence b = 320

e) Price Elasticity of demand and implications for RB's pricing strategy


Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
It measures how responsive demand is to a change in price.
the packages.
rkup on Full cost of $400 making the Selling price $600.

ecision, which also ensures that a profit is made provided the target volume is achieved. RB Co has adapted this strategy for the first tw
be delegated to junior management.
nd use similar mark up.

rised from this method may not be very realistic compared to what the customers are willing to pay for the product.
of production which is lower than the current capacity of production. This leads to multiple possibilties of selling price which makes th
if volume of sales is low, fixed costs are not guaranteed to be recovered.

f the packages.

n market in order to maximise short term profitabilty

electronic product.
nce early adopters or consumers are ready to pay higher prices to claim early ownership.
in later stages of the product cycle.

in order to gain acceptance of the product.

nchig a new product.


deand is highly elastic and hence will respond well to low prices.
e percentage change in price.
this strategy for the first two years .

elling price which makes the decision making a bit uncertain and wrong.
Stow Health Centre

a) Budgeted contribution earned by Stow Health Centre for year ended 30 June 20X1

Client Days Client Fee per DaVariable CoContribution per Total Contribution per year

15750 180 95 85 1338750


15750 180 85 95 1496250
15750 180 70 110 1732500
13125 200 95 105 1378125
13125 200 85 115 1509375
13125 200 70 130 1706250
10500 220 95 125 1312500
10500 220 85 135 1417500
10500 220 70 150 1575000

b)
1) Maximax
Maximax rule involves selecting the alternative that gives the maximum contribution.
This approach is usually suitable for an optimist and a risk seeking investor and hence the decision maker of Stow Health C
2) Maximin
Maximin rule involves selecting the alternative that maximises the minimum contribution.
This approach is usually suitable and appropriate for a risk averse pessimist who seeks to achieve the best results if the wo
Hence Stow Health Centre will choose a ontribution of $1,378,125 with a client fee of $ 200 which is the best outcome fro
3) Minimax Regret
Minimax Regret rule involves minimising the maximum Regret.
This approach is for a sore loser who does not wish to make a wrong decision.
Regret in this context is defined as the opportunity loss through having made the wrong decision.
Stow Health Centre can get Minimax Regret with the help of this following table-

Client Fee in $
Occupancy Level
180 200 220
High
Most Likely
Low

Maximum Regret

c)
Expected Value (EV) = Weighted average of all possible outcomes
Hence EV = $ 81.5

Client Fee No of Clients EV Payoff

180 15750 $ 81.5 $ 1,551,375.0


200 13125 $ 81.5 $ 1,555,312.5
220 10500 $ 81.5 $ 1,454,250.0
From above we can see that a client fees of $200 gives a greater contribution among other options of client fees and hen
maker of Stow Health Centre will choose the contribution of $1,732,500 where the client fee is $180.

he best results if the worse happens.


is the best outcome from contribution of $1,338,750 and $1,312,500 with client fees $180 and $220 respectively.
ns of client fees and hence client fees of $200 is the most suitable

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