A budget meeting was held to discuss the price to be charged for a newly developed product, the “O-PHONE”, which will be launched in 2010. You are, however, not happy to hear that your boss suggests a 25% mark up is added to the total unit cost of the product which he has calculated:

Budgeted total cost for O phone

£

Direct Material20.00
Direct Labour30.00
Variable Overhead15.00
Fixed Overhead45.00
110.00

When you question his logic the following facts are obtained from various parties represented in the meeting.

1.The product has virtually no competition at present, and the technology required to produce it is very expensive.

2.The company has applied for patent rights which, if granted, could protect it for 3 years. It is still waiting to have confirmation for their application for patent protection.

3.The fixed overhead is based on a sales estimate of 250,000 units in the first year.

4.£27 of the fixed overhead relates to a general overhead apportionment (overheads already incurred).

5.There is considerable export potential in a number of different countries.

You start to make some points, but unfortunately the meeting has to end as the Managing Director must leave to catch a flight to New York. He can see you have concerns and asks you to write a report and email it to him.

Required:

Write a report to your Managing Director explaining the reasons for your concerns about the pricing strategy being implemented by the Chief Management Accountant. Explain clearly the complex nature of the pricing decision and the various strategies that can be employed.
i need advice as to where to start and what to look into. Im not asking anyone to do my work.

We can’t do your homework/report for you if that’s what your asking.