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Chapter 2
Pricing and Costing in a Competitive Environment
Answers to End of Chapter Exercises

Q 2.1

Selling price per unit 36 30
Variable cost per unit 21 21
Contribution per unit 15 9
Units 4300 5800
Total contribution 64500 52200
i) A price of 36 leads to the higher contribution.
ii) There is a need to check assumptions; marketing strategy of the company,

A B
Q 2.2
Labour 10 5
Material 5 6
Overhead 5 5
Total cost 20 16
Mark-up (20%) 4 3.2
Selling price 24 19.2

Contribution 5
Contn 10 units 50
The management would need to consider whether it is a sufficiently large contract to
justify this contract. It would be necessary to consider the potential implications of:
i) The reaction of other customers if they find out about this large discount.
ii) The reaction of other competitors if they hear about these large discounts
being provided.
iii) Assumptions on costs

Q 2.3
Direct labour 200
Direct material 100
Overhead 100
400
20% profit margin 80
Quote 480

Q 2.4 Selling price 40 38 36 34 32 30 28

Variable cost 20 20 20 20 20 20 20
Contribution 20 18 16 14 12 10 8
Demand 2000 2400 3000 3800 4800 6000 7500
Total contribution 40000 43200 48000 53200 57600 60000 60000
Fixed cost 8000 12000 12000 16000 20000 24000 32000
Profit 32000 31200 36000 37200 37600 36000 28000
The optimum price that will lead to maximum profits is 32
Assumptions on costs at different volumes and the assumed relationship between price
and volume.

2008 John Wiley & Sons Ltd.

www.wileyeurope.com/college/bowhill
 2

Q 2.5 Revenue 50 x 25,000 = 1,250,000

Total cost 1,000,000
Profit 250,000
a) return on sales is 25%
b) Need to undertake cost reduction studies e.g. value engineering, tear down analysis

2008 John Wiley & Sons Ltd.

www.wileyeurope.com/college/bowhill