Pricing of Information Products

Question: Discuss about thePricing of Information Products. Answer: Budgeted Income Statement for Aussie Medical Company using both the alternatives are shown below - Aussie Medical Company Budgeted Income Statement Particulars Casual Agents Full time Salesperson Sales 30,000,000 30,000,000 Cost of Goods sold Variable 17,400,000 17,400,000 Fixed Cost 2,800,000 2,800,000 Gross Profit 9,800,000 9,800,000 Selling and Administrative Expenses Commissions @20% 6,000,000 - Commissions @10% - 3,000,000 Salary to Salesperson - 700,000 Sales Manager others Salary - 200,000 Travel Expenses - 400,000 Fixed Advertising Expense 800,000 1,300,000 Fixed Administrative Expense 3,200,000 3,200,000 Operating Income (200,000) 1,000,000 As per the question, if revenue remains same, the company should opt for Option of hiring full time sales person, as it can be clearly seen in the budgeted income statement that in this option, company would be having operating income of $1,000,000 whereas in case the company decides to have casual agents and pay 20% commission on sales then there would be a loss of $200,000. Particulars BM110 BM210 Selling Price per unit 160 195 Variable Cost per unit 25 30 Contribution per unit 135 165 Development cost per unit 70 100 Marketing and Administrative cost per unit 35 40 Total cost per unit 130 170 Operating Income per unit 30 25 As per the concept of costing, any cost that has already been incurred should not be relevant for decision making purpose. Such costs are called sunk costs. In the said question, 150 units of BM110 has already been made i.e. no more cost is going to be incurred on the same. Even the variable cost has been incurred, so the income from sale of 150 BM110 units = 150* selling price of 160 = 24,000. Whereas if we sell, BM210, the contribution per unit would be its selling price i.e. 195 the variable cost the company is incurring i.e. 30, so contribution per unit would be 195-30 = 165. The total contribution would be 150*165 = 24,750. In case of BM210, we will not consider the fixed cost like development cost and marketing cost as that will be incurred no matter these extra 150 units are sold or not. So in conclusion, BM210 should be introduced in the market immediately, as there is incremental revenue of 750. The company should also consider into factors like what are the benefits it is giving to the doctors and patients in bringing the latest technology, how are they impacting the industry, what kind of market is getting shaped. They should also consider how mature is the market to accept the product, whether proper distribution network is set-up to meet the demand of the new blood pressure machine. Penlights Particulars Amount $ Selling Price 6.00 Manufacturing Cost Direct Material 1.00 Direct labour 1.20 Variable Overhead 0.80 Fixed Overhead 0.50 Cost of Goods Sold 3.50 Gross Margin 2.50 Selling Cost Fixed Cost 0.90 Variable Cost 1.50 Net Profit per unit 0.10 If the company sells 5000 penlights to the government hospital, it wont be able to sell the same to its customers, as they are running at maximum capacity. Profit from selling 5000 units to customers = 5000*0.10 = $ 500 Profit from selling 5000 units to government = $ 1500 Fixed cost of Marketing, as that will be charged to the units (Variable cost will be avoided) = $ 1500 5000*0.90 = 1500 4500 = (3000) Since company would be incurring loss in government order, it is recommended not to supply to them in this situation. Particulars Unit Price Total Total Sales 20000 6 120000 Total Cost Fixed Overhead 20000 0.25 5000 Fixed Marketing Cost 20000 0.9 18000 Variable Marketing Cost 20000 1.2 24000 Existing Profit 20000 0.1 2000 Maximum Chargeable 20000 3.55 71000 Assumption: Outsourcing of Full capacity 20,000 units If the company decides to outsource its manufacturing of penlights, company wont be incurring costs like material cost or labour cost, but will still incur certain other expenses as shown above i.e. fixed overhead and fixed marketing cost and 80% of existing variable marketing cost. The selling price in the market will still be the same, no matter who produces it. The company would also like to maintain its existing margin of $ 2000 on total capacity and hence, the maximum the company can pay would be $ 71,000 for 20,000 units bringing it to $ 3.55 per unit. Any cost paid more than this would mean, company is not able to meet its current margin. References Frances H. 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