Illustration
DAR Ltd., has a budget to make 1,50,000 units of a product. The variable cost per unit is Rs.15. Fixed costs are Rs.13,50,000. The finance director has suggested that the cost plus approach should be used with a profit mark-up of 25%. However, the marketing director disagreed and has supplied the following information:
|
Price per unit (Rs.)
|
Demand (Units)
|
|
27
|
1,26,000
|
|
30
|
91,200
|
|
33
|
1,05,000
|
|
36
|
96,000
|
|
39
|
81,000
|
As a management accountant of the company, analyze the above proposals and comment.
Solution
-
Finance Director's Cost Plus Approach
According to this approach the selling price of the product will be as under:
Rs.
|
Variable cost
|
15.00
|
|
Fixed cost per unit
|
9.00
|
|
Total cost
|
24.00
|
|
Profit (25% of cost)
|
6.00
|
|
Selling price
|
30.00
|
At a selling price of Rs.30 per unit, the total sales will be 91,200 units.
The total profit will be as under:
Rs.
|
Contribution (91,200 x Rs.15)
|
13,68,000
|
|
Less: Fixed cost
|
13,50,000
|
|
Total profit
|
18,000
|
-
Marketing Director's Approach
According to this approach, the profit at different selling prices will be as under:
|
Price/
Unit
|
Contribution/
Unit
|
Units
Demanded
|
Total Contribution
(Rs.)
|
Fixed Cost
(Rs.)
|
Net Profit
(Rs.)
|
|
Rs.27
|
Rs.12
|
1,26,000
|
15,12,000
|
(13,50,000)
|
1,62,000
|
|
Rs.30
|
Rs.15
|
91,200
|
13,68,000
|
(13,50,000)
|
18,000
|
|
Rs.33
|
Rs.18
|
1,05,000
|
18,90,000
|
(13,50,000)
|
5,40,000
|
|
Rs.36
|
Rs.21
|
96,000
|
20,16,000
|
(13,50,000)
|
6,66,000
|
|
Rs.39
|
Rs.24
|
81,000
|
19,44,000
|
(13,50,000)
|
5,94,000
|
The above table shows that the marketing director's approach is correct and Rs.30 per unit is not the best price. The best price is Rs.36 per unit, which gives maximum profit.
The distribution decisions in a marketing mix is about getting the products to the customer. Some examples are - decision on distribution channels, warehousing, distribution centers, marketing coverage etc. One of the frequently required decision is to employ sales agents or establish one's own sales force.
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