When investing in new projects, both the monetary and
non-monetary aspects should be considered. Investing in new projects is
generally done to gain a profit in order for a business to expand and grow.
Although monetary benefits are easily interpreted and cost effective, not all
projects can be based solely on the monetary costs and benefits.
Non-monetary aspects of an investment includes corporate
social responsibility, it is vital that modern day businesses take into account
corporate social responsibility as consumers are prioritizing CSR and holding
businesses accountable for their environmental, legal, political and social
actions. Corporate social responsibility could be considered one of the main
non-monetary benefits; this is due to the fact that it allows corporations to
build trust with customers, which will allow corporations to attract new
customers while retaining their existing consumers.
In January 2009, the Department for Communities and Local
Government published a Multi-Criteria Analysis, which provided a detailed
explanation of MCA theory and practice. The aim of this was to provide an
appropriate method to assess non-monetary factors in order to present them with
When investing in a project both the monetary and
non-monetary aspects are relevant. In order for a company to invest in a
project, they have to decide whether future return is likely to be achieved;
therefore numerical analysis is critical when investing, as it will allow the
directors make a decision based on the returns estimated. Numerical analysis
also allows companies acknowledge many different variables such as calculating
the risk and uncertainty involved in a certain project; this allows companies
to measure whether the paybacks exceed the initial cost of investment.
When discussing price sensitivity most economists will often
refer to price elasticity of demand. This measures the relationship between a
change in the quantity demanded and the direct change in price. In order to
establish the optimum price, the relationship between the price of a product
and demand is crucial, the Economist’s approach to pricing will use price
elasticity of demand to calculate the profit maximising price. With consumers
reacting significantly to price changes, the economist pricing approach allows
companies to find and set an optimum price. This allows companies to test
numerous pricing circumstances in order to find the optimal price.
Cost-Plus pricing is a strategy, which is used to maximise
the rate of return for a company. This is done by adding direct material costs,
direct labour costs and overhead costs and then applying a percentage mark up,
the difference between selling price and the cost. The simplicity of this
method means that it is easy to derive a product price. However this method does
not take into account the prices charged by the competition, which can be a
vital error for Amaryllo Ltd. Rapidly changing industries will not benefit from
this approach as pricing to low will mean they could be giving away potential
profits, or to high will mean they could be making insignificant revenues.
Absorption costing considers all manufacturing cost associated
with manufacturing a particular product, including direct
materials, direct labour and both variable and fixed manufacturing overheads,
in return giving the cost of a finished unit in the inventory. This technique
allows the cost per unit to remain constant when the level of output remains
the same. This approach proposes an advantage when all manufactured products
during the accounting period are not sold, as each product in the inventory has
a value that includes part of the fixed overhead, due to the assignment of a
per-unit amount for fixed overheads. However, absorption costing could require
a considerable amount of overhead costs; a large proportion of the costs may
not be directly traceable to the product.
In conclusion, the most suitable pricing approach to this project
is absorption costing. This comes down to many different factors. Firstly, the
fact that absorption costing takes into account all the costs involved in
production means it does a better job at precisely tracking profits, therefore
providing the company with a precise representation of the estimated profits.