Cima P2 Exam Question No 19

Question No 19:

Explain the likely changes that will occur in the unit selling prices AND in the unit production costs, compared to the preceding stage.

Unit selling prices
These are likely to be reducing for a number of reasons:
The product will become less unique as competitors use reverse engineering to introduce their versions of the product
PT may wish to discourage competitors from entering the market by lowering the price and thereby lowering the unit profitability
The price needs to be lowered so that the product becomes attractive to customers in different market segments thus increasing demand to achieve growth in sales volume.
Unit production costs
These are likely to reduce for a number of reasons:
Direct materials are being bought in larger quantities and therefore PT may be able to negotiate better prices from its suppliers thus causing unit material costs to reduce
Direct labour costs may be reducing if the product is labor intensive due to the effects of the learning and experience curves
Other variable overhead costs may be reducing as larger batch sizes reduce the cost of each unit
Fixed production costs are being shared by a greater number of units.