Ray's Case
Ray's Case
1. There is little to no relationship between the L-42 pricing decision and the company's future need for capital funds. Why is it that only the pricing of the L-42 product line was raised while the other carpet lines stayed the same? The replacement of capital assets and machinery relates to all product lines and NOT JUST the L-42 product line. A mark-up to build up a reserve to replace old capital assets and machinery should be accounted for throughout the various product lines unless any particular product line was under pricing pressure from Forner's competitors.
2. Excel spreadsheet to analyse -
Assuming no other prices are to be considered, Former should price L-42 at $3.95. The primary reason for this from a costing perspective is that the L-42 is produced in a department whose equipment could not be used to produce Forner's other carpets. All the more reason why the fixed costs of the L-42 department should not be considered in the pricing of L-42. Removing the fixed costs of the L-42 department, the Total Variable Cost of L-42 is only approximately $1.55 per square yard. And if you factor in the Direct Overhead costs of the L-42 department, it is still only approximately $0.53 per square yard more, for a total direct cost of approximately $2.08 per square yard.
3. If Forner's competitors held their price at $3.95, Forner would need to sell approximately 113,000 square yards of L-42 at $4.75 in order to earn the same profit as selling 150,000 square yards at a price of $3.95.
Please see the spreadsheet for the supporting calculations.
4. Information that would be critical to the pricing of L-42 is the cost to Forner's competitors of manufacturing carpets that are competitive with L-42. We can see that Forner is required to use one of their special machines to manufacture L-42. Is it possible that Forner's competitors regular machines, which may be newer and more advanced than Forner's other machines? This would make the decision
1. There is little to no relationship between the L-42 pricing decision and the company's future need for capital funds. Why is it that only the pricing of the L-42 product line was raised while the other carpet lines stayed the same? The replacement of capital assets and machinery relates to all product lines and NOT JUST the L-42 product line. A mark-up to build up a reserve to replace old capital assets and machinery should be accounted for throughout the various product lines unless any particular product line was under pricing pressure from Forner's competitors.
2. Excel spreadsheet to analyse -
Assuming no other prices are to be considered, Former should price L-42 at $3.95. The primary reason for this from a costing perspective is that the L-42 is produced in a department whose equipment could not be used to produce Forner's other carpets. All the more reason why the fixed costs of the L-42 department should not be considered in the pricing of L-42. Removing the fixed costs of the L-42 department, the Total Variable Cost of L-42 is only approximately $1.55 per square yard. And if you factor in the Direct Overhead costs of the L-42 department, it is still only approximately $0.53 per square yard more, for a total direct cost of approximately $2.08 per square yard.
3. If Forner's competitors held their price at $3.95, Forner would need to sell approximately 113,000 square yards of L-42 at $4.75 in order to earn the same profit as selling 150,000 square yards at a price of $3.95.
Please see the spreadsheet for the supporting calculations.
4. Information that would be critical to the pricing of L-42 is the cost to Forner's competitors of manufacturing carpets that are competitive with L-42. We can see that Forner is required to use one of their special machines to manufacture L-42. Is it possible that Forner's competitors regular machines, which may be newer and more advanced than Forner's other machines? This would make the decision