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CMA Final · Strategic Cost Management · Pricing Decisions and Strategies

Sundaram Electronics sells a gadget with demand function Q = 1,000 - 5P, where P is price in rupees. Variable cost is Rs 40 per unit and fixed costs do not change with output. What price maximises profit?

The profit-maximising price is Rs 120. Setting marginal revenue equal to marginal cost, 200 - 0.4Q = 40 gives Q = 400, and from the demand function P = (1000 - 400)/5 = Rs 120, yielding profit of Rs 32,000 before fixed costs.

  1. ARs 100
  2. BRs 120Correct
  3. CRs 140
  4. DRs 200

Explanation

Profit = (P - 40)(1000 - 5P). Derivative: 1000 - 5P - 5(P - 40) = 1200 - 10P = 0, so P = 120. Check: Q = 400, profit = 80 x 400 = 32,000, versus P=100: 60x500=30,000. Rs 100 ignores... Rs 140 gives 100x300=30,000, lower. Rs 200 is the revenue-maximising price (zero quantity), wrongly chosen.

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