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Pricing Decisions


Question 2: Pricing & possible plant closure Handy Household Products Ltd is a multiproduct company with several manufacturing plants. The Fremantle plant manufactures and distributes two household cleaning and polishing compounds, standard and commercial, under the Clean & Bright label. The forecast operating results for the first six months of the current year, when 100000 boxes of each compound are expected to be manufactured and sold, are presented inthe following statement: Clean&BrightCompounds,FremantleplantForecastresultsofoperationsforthesix-monthperiod endingJune30(in$'000s) Sales Standard $2000 Commercial $3000 Total $5000 Cost of goods sold 1600 1900 3500 Grossprofit $ 400 $1100 $1500 Selling and administrative expenses: Variable $ 400 $ 700 $1100 Fixed* 240 §QQ Total selling and administrative expenses $ 640 $1060 $1700 Profit(loss)beforetaxes $ (240) $ 40 = $(200) Handy Household Products' top management believe that the loss for the first six months reflects a tight profit margin caused by intense competition. Management also believe that many companies will leave this market by next year and profit should improve. Required: 1. What unit selling price should management select for each of the Clean & Bright compounds for the remaining six months of the year to maximise profit? Support your selection with appropriatecalculations. 2. Independently of your answer to requirement 1, assume that the optimum alternatives for the last six months were as follows: a selling price of $23 and volume of 50 000 boxes for the standard compound, and a selling price of $35 and volume of 35 000 boxes for the commercial compound. (a) Should management consider closing down the plant's operations until January 1 of the next year in order to minimise its losses? Support your answer with appropriate calculations. (b) Identify and discuss the strategic factors that should be considered in deciding whether the Fremantle plant should be closed down during the last six months of the current year.