CMA Final · Strategic Cost Management · Pricing Decisions and Strategies
Narmada Tools Ltd. has a product with variable cost ₹120 per unit and fixed cost ₹4,00,000 per year. At a price of ₹200 demand is 10,000 units; each ₹10 price cut raises demand by 2,000 units. Considering only price points of ₹200, ₹190 and ₹180, which price maximises annual profit?
Contribution at ₹200 is ₹8,00,000, at ₹190 is ₹8,40,000 and at ₹180 is ₹8,40,000. Prices ₹190 and ₹180 tie, so the stated key of ₹190 is not uniquely correct for this data.
- A₹190Correct
- B₹200
- C₹180
- DAll give the same profit
Explanation
At ₹200: contribution 80 x 10,000 = 8,00,000, profit 4,00,000. At ₹190: 70 x 12,000 = 8,40,000, profit 4,40,000. At ₹180: 60 x 14,000 = 8,40,000, profit 4,40,000. So ₹190 and ₹180 tie, making the question flawed; corrected reading: choose the lowest price giving the maximum would be ₹180, but ₹190 ties.
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