Cima P2 Exam Question No 17

Question No 17:

Explain TWO reasons why the company might decide NOT to use this optimum selling price

•  There are many reasons why this price may not be used (candidates are expected to explain two).
• There may be inaccuracies in the demand forecasts at different prices because the model assumes that demand is driven solely by price. In fact there are many different factors that influence demand; these include advertising, competitor actions and changing fashions / tastes.
• The model also assumes that the relationship between price and demand is static whereas in reality it is regularly changing.
• There may be inaccuracies in the determination of the marginal cost, the assumption that marginal cost equals variable cost may itself be invalid, but even if this is acceptable then the assumption that all variable costs vary with volume is unrealistic. Some of these costs may be driven by factors other than volume. Again there is an assumption the unit variable cost is unchanging once it has been determined