Reference no: EM132971334
Question - ABC Ltd are considering launching a new product, which will provide access to a new market place. There will be a learning curve that has been estimated as 75%. A customer has requested a quote for 1,000 units which could be manufactured as one batch, but may subsequently place an order for another 1,000 units.
Initial set up costs for ABC Ltd to produce the first 1,000 units are £5,000. No further set up costs will be incurred.
Material costs are £540 per unit. The first batch will take 180 labour hours to produce and labour costs are £10.45 per hour.
Required -
a) What is the minimum price that ABC Ltd should quote if only one batch is ordered?
b) What should be the minimum price of the follow on order for a second batch?
c) What would be the minimum price if an order for the first two batches were received together?
d) The Managing Director of ABC Ltd thinks that there may be a wider market for this product and plans to spend £2,000 on advertising and to sell the batch for £824. At this price level, the company expects to sell 56 batches (in addition to the two involved in the initial order). Would ABC Ltd make a profit or loss on these extra 56 products?
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