When investing in new projects, both the monetary andnon-monetary aspects should be considered. Investing in new projects isgenerally done to gain a profit in order for a business to expand and grow.Although monetary benefits are easily interpreted and cost effective, not allprojects can be based solely on the monetary costs and benefits. Non-monetary aspects of an investment includes corporatesocial responsibility, it is vital that modern day businesses take into accountcorporate social responsibility as consumers are prioritizing CSR and holdingbusinesses accountable for their environmental, legal, political and socialactions. Corporate social responsibility could be considered one of the mainnon-monetary benefits; this is due to the fact that it allows corporations tobuild trust with customers, which will allow corporations to attract newcustomers while retaining their existing consumers.In January 2009, the Department for Communities and LocalGovernment published a Multi-Criteria Analysis, which provided a detailedexplanation of MCA theory and practice. The aim of this was to provide anappropriate method to assess non-monetary factors in order to present them withmonetary factors.
When investing in a project both the monetary andnon-monetary aspects are relevant. In order for a company to invest in aproject, they have to decide whether future return is likely to be achieved;therefore numerical analysis is critical when investing, as it will allow thedirectors make a decision based on the returns estimated. Numerical analysisalso allows companies acknowledge many different variables such as calculatingthe risk and uncertainty involved in a certain project; this allows companiesto measure whether the paybacks exceed the initial cost of investment.
When discussing price sensitivity most economists will oftenrefer to price elasticity of demand. This measures the relationship between achange in the quantity demanded and the direct change in price. In order toestablish the optimum price, the relationship between the price of a productand demand is crucial, the Economist’s approach to pricing will use priceelasticity of demand to calculate the profit maximising price. With consumersreacting significantly to price changes, the economist pricing approach allowscompanies to find and set an optimum price. This allows companies to testnumerous pricing circumstances in order to find the optimal price.Cost-Plus pricing is a strategy, which is used to maximisethe 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 thismethod means that it is easy to derive a product price. However this method doesnot take into account the prices charged by the competition, which can be avital error for Amaryllo Ltd. Rapidly changing industries will not benefit fromthis approach as pricing to low will mean they could be giving away potentialprofits, or to high will mean they could be making insignificant revenues.Absorption costing considers all manufacturing cost associatedwith manufacturing a particular product, including directmaterials, direct labour and both variable and fixed manufacturing overheads,in return giving the cost of a finished unit in the inventory. This techniqueallows the cost per unit to remain constant when the level of output remainsthe same.
This approach proposes an advantage when all manufactured productsduring the accounting period are not sold, as each product in the inventory hasa value that includes part of the fixed overhead, due to the assignment of aper-unit amount for fixed overheads. However, absorption costing could requirea considerable amount of overhead costs; a large proportion of the costs maynot be directly traceable to the product. In conclusion, the most suitable pricing approach to this projectis absorption costing. This comes down to many different factors.
Firstly, thefact that absorption costing takes into account all the costs involved inproduction means it does a better job at precisely tracking profits, thereforeproviding the company with a precise representation of the estimated profits.