E Ventures is considering producing a new line of hang gliders. The company esti
ID: 2435608 • Letter: E
Question
E Ventures is considering producing a new line of hang gliders. The company estimate that variable costs will be $325 per unit and fixed costs will be $330,000 per year.Required: E Ventures has a pricing policy that dictates that a product’s price must be equal to full cost plus 60%. To calculate full cost, E Ventures must estimate the number of units it will produce and sell in a year. E Ventures 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? Right after the beginning of the year, the economy takes a dive and E Ventures fins that demand for their gliders has fallen drastically. E Ventures revises its sales and production estimate to just 1,000 gliders for the year. According to the company policy, what price must they now set? What is likely to happen to the number of gliders sold if Emerson follows company policy and raises the glider prove to that calculated? Why is setting price by marking up cost inherently circular for a manufacturing firm?
Explanation / Answer
As you lower unit sales, the $/unit sales increases. This happens because the fixed costs do not change with sales and therefore the less yu sell the bigger % of costs is fixed, and it becomes more expensive. In other words, if you sell zero units, you still have the same amount of fixed costs as if you sold a 1000 units. This is why in manufacturing this is a circular motion. Or I sell less at a higher price or sell more at a lower price. (Although, I can't imagine the firm does not get squeezed on markup as well...)
Fixed costs 330,000 330,000 Variable Costs 325 325 Units 1,500 1,000 Total Costs 817,500 655,000 Markup % 160% 160% Total Price 1,308,000 1,048,000 Price per Unit 872 1,048Related Questions
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