Emerson Ventures is considering purchasing a new line of hang gliders. The compa

Question

Emerson Ventures is considering purchasing a new line of hang gliders. The company estimates that variable costs will be $325 per unit and fixed costs will be $330,000 per year.

a.Emerson has a pricing policy that dictates that a product’s price must be equal to full cost plus 60 percent. To calculate full cost, Emerson must estimate the number of units it will produce and sell in a year. Emerson estimates at the beginning of the year that they will sell 1,500 gliders and sets their price according to that sales and production volume. What is the price?

b.Right after the beginning of the year, the economy takes a dive and Emerson finds that demand for their gliders has fallen drastically; Emerson revises its sales and production estimates to just 1,000 gliders for the year. According to the company policy, what price must they now set?

c.What is likely to happen to the number of gliders sold if Emerson follows company policy and raises the glider price to that calculated in part b?

d.Why is setting price by marking up cost inherently circular for a manufacturing firm?

Explanation / Answer

a. Total fixed cost 330000 Per uint(330000 / 1500) 220 Variable cost per unit 325 Total Cost per Unit 545 Cost + 60% (545*60%) 327 Selling Price $872 b. Total fixed cost 330000 Per uint(330000 / 1000) 330 Variable cost per unit 325 Total Cost per Unit 655 Cost + 60% (655*60%) 393 Selling Price $1,048 c. If Emerson follows company policy he has to raise selling price, if company selling price increases then automatically sales will come down, profits will be lower. d. Generally manufacturing firms product selling price would be depend on cost of that product. If they fixed lower than cost they have to bare losses, if they fixed more than cost profit will rise. So every company wants profits only. That's why product cost is very important for pricing decision. Thank you.... Total fixed cost 330000 Per uint(330000 / 1500) 220 Variable cost per unit 325 Total Cost per Unit 545 Cost + 60% (545*60%) 327 Selling Price $872

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