The managing director of Zambia plc has devolved some decision making to operating divisions but wants to be sure that decisions will be in line with group policy. In line with this he is investigating a recent decision to increase the price of the only product of Southern division of K14.50 per unit due to rising cots.. The following information and estimates were available for the management of Southern division. Last year 75 000 units were sold at K12 each with a total unit cost of K9 of which K6 were variable costs. For the year ahead the following cost and demand estimates have been made. Unit variable costs Pessimist Probability 0.15 K7.00 per unit Most likely Probability 0.65 K6.50 per unit Optimistic Probability 0.20 K6.20 per unit Total fixed costs Pessimist Probability 0.30 increase by 50 % Most likely Probability 0.50 increase by 25 % Optimistic Probability 0.20 increase by 10 % Demand estimates at various prices (units) Price per unit K13.50 K14.50 Pessimist Probability 0.30 45 000 35 000 Most likely Probability 0.50 45 000 55 000 Optimistic Probability 0.20 70 000 68 000 (unit variable costs, fixed costs and demand estimates are statistically independent) For this type of decision the group has decided9u That the option should be chosen which has the highest expected outcome with at least an 80 % chance of breaking even. Required: Assess whether the decision was made in accordance with group guidelines Comment on the estimates for the decision and describe what other factors might have been considered
- The managing director of Zambia plc has devolved some decision making to operating divisions but wants to be sure that decisions will be in line with group policy. In line with this he is investigating a recent decision to increase the price of the only product of Southern division of K14.50 per unit due to rising cots..
The following information and estimates were available for the management of Southern division.
- Last year 75 000 units were sold at K12 each with a total unit cost of K9 of which K6 were variable costs.
- For the year ahead the following cost and demand estimates have been made.
Unit variable costs
Pessimist Probability 0.15 K7.00 per unit
Most likely Probability 0.65 K6.50 per unit
Optimistic Probability 0.20 K6.20 per unit
Total fixed costs
Pessimist Probability 0.30 increase by 50 %
Most likely Probability 0.50 increase by 25 %
Optimistic Probability 0.20 increase by 10 %
Demand estimates at various prices (units)
Price per unit K13.50 K14.50
Pessimist Probability 0.30 45 000 35 000
Most likely Probability 0.50 45 000 55 000
Optimistic Probability 0.20 70 000 68 000
(unit variable costs, fixed costs and demand estimates are statistically independent)
For this type of decision the group has decided9u
That the option should be chosen which has the highest expected outcome with at least an 80 % chance of breaking even.
Required:
- Assess whether the decision was made in accordance with group guidelines
- Comment on the estimates for the decision and describe what other factors might have been considered.
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