QUESTION 1
1.1
Total contribution = [(Price-Variable cost) x Units] - Monthly Campaign Costs
Pricing Option Market Calculation: [(Price - R300) × Units] - Payoff (R)
State Campaign Cost
Premium Strong $[(R520 - R300) \times 2,800] - R120,000$ 496,000
(Price: R520) Base $[(R520 - R300) \times 2,200] - R120,000$ 364,000
Weak $[(R520 - R300) \times 1,600] - R120,000$ 232,000
Standard Strong $[(R480 - R300) \times 3,500] - R90,000$ 540,000
(Price: R480) Base $[(R480 - R300) \times 2,900] - R90,000$ 432,000
Weak $[(R480 - R300) \times 2,100] - R90,000$ 288,000
Penetration Strong $[(R450 - R300) \times 4,300] - R70,000$ 575,000
(Price: R450) Base $[(R450 - R300) \times 3,500] - R70,000$ 455,000
, Weak $[(R450 - R300) \times 2,700] - R70,000$ 335,000
1.2 Expected Monetary value
Probabilities : Strong (0.30), Base (0.50), Weak (0.20)
-EMV Premium
(496000 x 0.30) + (364000 x 0.50) + (232000 x 0.20) = R377 200
-EMV Standard
(540000 x 0.30) + (432000 x 0.50) + (288000 x 0.20) = R435 600
-EMV Penetration
(575000 x 0.30) + (455000 x 0.50) + (335000 x 0.20) = R467 000
The penetration pricing option should be selected as it yields the highest EMV of R467 000
1.3 Management should consider the following before finalizing the price:
1. Brand Positioning: A penetration price may signal a budget brand to consumers,
whereas a premium price builds an image of exclusivity and high quality. Management
must ensure the price aligns with the long-term brand identity.
2. Competitor Response: A low penetration price might trigger a price war with existing
meal kit providers in South Africa, potentially eroding profit margins for everyone in the
market.
QUESTION 2
2.1
COST RELEVANT/IRRELEVANT REASON
a) Allocated fixed factory Irrelevant These are unavoidable, sunk
overhead (R1400 per costs that the factory will
unit) incur regardless of whether
this special order happens
b) Direct Materials relevant variable cost directly tied to
producing the extra units.
c) Variable selling/ Irrelevant no variable selling or
distribution on normal distribution commission
sales applies to this special order.
1.1
Total contribution = [(Price-Variable cost) x Units] - Monthly Campaign Costs
Pricing Option Market Calculation: [(Price - R300) × Units] - Payoff (R)
State Campaign Cost
Premium Strong $[(R520 - R300) \times 2,800] - R120,000$ 496,000
(Price: R520) Base $[(R520 - R300) \times 2,200] - R120,000$ 364,000
Weak $[(R520 - R300) \times 1,600] - R120,000$ 232,000
Standard Strong $[(R480 - R300) \times 3,500] - R90,000$ 540,000
(Price: R480) Base $[(R480 - R300) \times 2,900] - R90,000$ 432,000
Weak $[(R480 - R300) \times 2,100] - R90,000$ 288,000
Penetration Strong $[(R450 - R300) \times 4,300] - R70,000$ 575,000
(Price: R450) Base $[(R450 - R300) \times 3,500] - R70,000$ 455,000
, Weak $[(R450 - R300) \times 2,700] - R70,000$ 335,000
1.2 Expected Monetary value
Probabilities : Strong (0.30), Base (0.50), Weak (0.20)
-EMV Premium
(496000 x 0.30) + (364000 x 0.50) + (232000 x 0.20) = R377 200
-EMV Standard
(540000 x 0.30) + (432000 x 0.50) + (288000 x 0.20) = R435 600
-EMV Penetration
(575000 x 0.30) + (455000 x 0.50) + (335000 x 0.20) = R467 000
The penetration pricing option should be selected as it yields the highest EMV of R467 000
1.3 Management should consider the following before finalizing the price:
1. Brand Positioning: A penetration price may signal a budget brand to consumers,
whereas a premium price builds an image of exclusivity and high quality. Management
must ensure the price aligns with the long-term brand identity.
2. Competitor Response: A low penetration price might trigger a price war with existing
meal kit providers in South Africa, potentially eroding profit margins for everyone in the
market.
QUESTION 2
2.1
COST RELEVANT/IRRELEVANT REASON
a) Allocated fixed factory Irrelevant These are unavoidable, sunk
overhead (R1400 per costs that the factory will
unit) incur regardless of whether
this special order happens
b) Direct Materials relevant variable cost directly tied to
producing the extra units.
c) Variable selling/ Irrelevant no variable selling or
distribution on normal distribution commission
sales applies to this special order.
