Gam Co sells electronic equipment and is about to launch a new product onto the market. It

needs to prepare its budget for the coming year and is trying to decide whether to launch the product at a price of $30 or $35 per unit. The following information has been obtained from market research:

Notes

1 Variable production costs would be $12 per unit for production volumes up to and including 100,000 units each year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall to $11 for all units produced.

2 Advertising costs would be $900,000 per annum at a selling price of $30 and $970,000 per annum at a price of $35.

3 Fixed production costs would be $450,000 per annum.

Required:

(a) Calculate each of the six possible profit outcomes which could arise for Gam Co in the coming year. (8 marks)

(b) Calculate the expected value of profit for each of the two price options and recommend, on this basis, which option Gam Co would choose. (3 marks)

(c) Briefly explain the maximin decision rule and identify which price should be chosen by management if they use this rule to decide which price should be charged. (3 marks)

(d) Discuss the factors which may give rise to uncertainty when setting budgets. (6 marks)