The Fastener Company manufactures office equipment for retail stores. Carol Wats

Question

The Fastener Company manufactures office equipment for retail stores. Carol Watson, the vice president of marketing, has proposed that Fastener introduce two new products: an electric stapler and an electric pencil sharpener. Watson has requested that the Profit Planning Department develop preliminary selling prices for the two new products for her review. Profit Planning has followed the company's standard policy for developing potential selling prices. It has used all data available for each product. The data accumulated by Profit Planning are as follows: Electric Stapler Electric pencil sharpener Estimated annual demand in units 16,000 12,000 Estimated unit manufacturing costs $14 $15 Estimated unit selling and and administrative expenses $3 N/A Assets employed in manufacturing $160,000 N/A Fastener plans to use an average of $1,200,000 in assets to support operations in the current year. The condensed budgeted income statement that follows reflects the planned return on assets of 20% ($240,000/$1,200,000) for the entire company for all products. Fastener Company Budgeted Income statement For the Year Ended May 31 ( in thousands) Revenue $2,400 Cost of goods sold 1,440 Gross profit $960 Selling and administrative expenses 720 Operating income $240 1.Calculate a potential selling price for (a) the stapler, using return on assets pricing, and (b) the pencil sharpener, using gross margin pricing. 2Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer 3.Which of the two pricing methods--return on assets pricing or gross margin pricing pricing---is more appropriate for decision analysis? Explain your answer 4.Discuss the additional steps Carol Watson is likely to take in setting an actual selling price for each of the two products after she receives their potential selling prices ( as calculated in requirement 1.) (CMA adapted) Question 1 Please

Explanation / Answer

Answer:1

Electric Stapler (return on assets pricing):

Return-on-assets based price = Total costs and expenses per unit + [ Desired rate of return *(Total costs of assets employed/anticipated units to be produced)]

=($14 + $3) + [20%*(160000/16000)]

= $17+ (20%*10)

=$17+ $2 = $19

Electric pencil sharpner (gross margin pricing):

Markup percentage = (Desired profit + Total selling, general and administrative expenses)/ Total production costs

= (240000+720000)/1440000

= 960000/1440000 = 66.67%

Gross margin based price = Total production costs per unit + (Markup percentage *Total production costs per unit)

= $15 + (66.67%* 15)

= $15+$10

=$25

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.