Answer to Question #305552 in Marketing for Hassan

Question

You have been recently recruited as a management accountant and assigned to head the new department.

The company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each £2 reduction in the selling price. The company’s present selling price is £70 per unit and variable expenses are £40 per unit. Fixed expenses are £540,000 per year. The present annual sales volume (at the £70 selling price) is 15,000 units.

The market research has also shown that the product will attract more customers and raise large amount of revenue to the firm in the future. However, there is always a debate within the company accounting department on how to calculate the performance (profit). The chief financial accountant believes that absorption costing does a better job of matching costs with revenues thus presents more accurate profit figure than variable costing.

Answer 1

We are all confronted with the underlying economic challenge of determining how to allocate limited resources. This is a challenge that every organization, government, and society must deal with. It's a problem that we're all dealing with in our families and on our own. Institutions exist in the United States and throughout most the world to facilitate the distribution of scarce resources. The New York Stock Exchange, as well as the London Stock Exchange, the Chicago Board of Trade, and other such stock, bond, and commodities markets, are examples of such institutions. These financial markets are sophisticated and ostensibly efficient methods for routing funds from investors to enterprises that they feel would most profitably use those funds.