Question: Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the ‘basic', the ‘standard' and the ‘comprehensive'. On the basis of past experience, the business plans next year to work at absolute full capacity as follows:
Service Number of units of the service Selling price Variable cost per unit
£ £
Basic 11,000 50 25
Standard 6,000 80 65
Comprehensive 16,000 120 90
The business's fixed costs total £660,000 a year. Each service takes about the same length of time, irrespective of the level. One of the accounts staff has just produced a report that seems to show that the standard service is unprofitable. The relevant extract from the report is as follows:
Standard service cost analysis
£
Selling price per unit 80
Variable cost per unit (65)
Fixed cost per unit (20) ( £660,000⁄(11,000+6,000+16,000))
Net loss (5)
Required: (a) Should the standard service be offered next year, assuming that the quantity of the other services could not be expanded to use the spare capacity?
(b) Should the standard service be offered next year, assuming that the released capacity could be used to render a new service, the ‘nova', for which customers would be charged £75, and which would have variable costs of £50 and take twice as long as the other three services?
(c) What is the minimum price that could be accepted for one unit of the basic service, assuming that the necessary capacity to expand it will come only from not offering the standard service?