Question: The Crispy Biscuit Company (CBC) has developed
The Crispy Biscuit Company (CBC) has developed a new variety of biscuit that it has successfully test marketed in different parts of the country. It has, therefore, decided to go ahead with full-scale production and is in the process of commissioning a production line located in a hitherto unutilized part of the main factory building. The new line will be capable of producing up to 50 000 packets of new biscuit each week.
The factory accountant has produced the following schedule of the expected unit costs of production at various levels of output:
1. The labour costs represent the cost of the additional labour that would require to be taken on to operate the new line.
2. Machine costs include running costs, maintenance costs and depreciation.
3. Factory overhead costs are fixed for the factory overall but are allocated to cost centres at 25 per cent of total direct costs.
In addition to establishing product acceptability, the test marketing programme also examined the likely consumer response to various selling prices. It concluded that the weekly
revenue likely to be generated at various prices was as follows:
Retail price ………………………………………………………. Revenue to CBC
£0.62 …………………………………………………………………………… £15 190
£0.68 …………………………………………………………………………… £14 960
£0.78 …………………………………………………………………………… £11 310
£0.84 …………………………………………………………………………… £10 500
£0.90 …………………………………………………………………………… £10 350
£0.98 …………………………………………………………………………… £4 900
The above prices represent the prices at which the product was test marketed, but any price between £0.60 and £0.99 is a possibility. The manufacturer receives 50 per cent of the retail revenue.
Requirements:
(a). Estimate the variable costs of producing the new biscuit, using any simple method (such as the high–low method).
(b). Using linear regression, estimate the relationship between the price charged by CBC and the expected demand.
(c). Using the above estimates, calculate the optimum price and evaluate how sensitive your solution is to changes in this price.
(d). Outline the practical problems faced in attempting to derive a unit cost for a new product.
The question provided the following formula for answering this question:
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